For many senior employee and executives, share options and other equity awards are a significant part of their remuneration package. When exit agreements are being negotiated, it's crucial that both employer and employee understand how share and option schemes work on termination and, if more favourable treatment has been agreed, what needs to happen to ensure that the employee gets the intended benefit. The recent case of Dixon v GlobalData plc illustrates the pitfalls of unclear communication and vague documentation.
Background
Mr Dixon was employed from January 2006 by Canadean Limited, later acquired by GlobalData plc. In January 2011, Mr Dixon was issued with 400,000 ordinary share options. In September 2014 he was informed that his employment would be terminated under a settlement agreement. However, shortly afterwards, Mr Dixon was asked to remain with the Company until the end of December 2014 and to agree to new restrictive covenants under the settlement agreement. Mr Dixon alleged that he was assured by the CEO that he could keep his share options after leaving, and the CEO had stated in writing that Mr Dixon's outstanding share options would be added to the settlement agreement and would "vest in line with current conditions".
The settlement agreement similarly stated "The Employee shall retain his entitlement to 44,800 share options in Progressive Digital Media Group PLC's Share Option Scheme following the termination of his employment."
However, under the option plan rules, an employee's options ceased to be exercisable on notice of termination of employment, unless the period during which they could be exercised was extended at the discretion of the Company. In 2020 and 2022, Mr Dixon attempted to exercise his share options but was informed that they had lapsed on the termination of his employment.
The court find in favour of the employee
The High Court determined that the CEO was not authorised by the Board to exercise discretion to extend the period when Mr Dixon's share options could be exercised and so, contractually, the settlement agreement had not altered the default position under the option plan and his options had lapsed.
Despite this, Mr Dixon won the case on the basis of proprietary estoppel – an equitable principle that prevents a property owner from going back on a promise about property rights in certain circumstances.
The CEO had assured Mr Dixon that his options would continue to be exercisable following the end of his employment and it was reasonable for Mr Dixon to have taken this at face value and assumed that he was being offered something of "real value" by the Company (i.e. something other than his options simply lapsing under the option plan). The Court held that this assurance related to property (i.e. the share options), and that Mr Dixon relied upon that assurance to his detriment, by agreeing under the settlement agreement to work until the end of 2014 and then to be bound by additional restrictive covenants. The Company's failure to give effect to that assurance was unconscionable and Mr Dixon was entitled to a remedy as a result.
The Company had attempted to rely on the exclusion clause in the share option plan, which prevented an employee whose employment had come to an end from seeking a remedy in respect of a loss of right or benefit, including any options held which lapse due to cessation of employment. The High Court rejected this argument and held that the exclusion was intended to protect the Company from a claim that an employee had suffered loss flowing from the cessation of their employment, which didn't apply in this case. Mr Dixon's claim was based in equity for the denial of rights he was assured would continue, which he relied upon to his detriment.
Dealing with share options on termination
Proprietary estoppel, unlike other forms of estoppel, can be used as the basis for a claim and not just a defence. The fact that this equitable remedy was available meant that contractual terms in the option scheme and the settlement agreement did not allow the employer to escape liability.
For employers, this case serves as an important reminder to communicate clearly (and preferably in writing) when discussing share options and how these will be addressed in an exit agreement. If the employer intends for share options to be dealt with in accordance with the rules of the scheme only, they need to be clear that this is all that is on offer, particularly where the employee is being asked to agree to additional obligations.
On the other hand, an employer intending to offer more beneficial treatment to an employee must ensure that they understand what formalities are necessary to achieve the required result. If the Board or Remuneration Committee need to exercise a discretion, this must be done correctly, such as with a Board resolution.
We frequently advise senior executives about share options in settlement agreements, and dealing with options and other equity interests is often the most complex (and valuable) aspect. This case underlines the importance of ensuring that any formal steps needed to realise the value of options are correctly identified and properly addressed in the agreement. A vague indication that a discretion may be exercised in the employee's favour is not enough. While the employee succeeded in this case, the huge expense of litigation might have been avoided with a sufficiently clear settlement agreement.
Want to hear more from us? 
