In the modern and fast-moving world of work, it is increasingly important for companies to attract, motivate and retain qualified employees in the long term. Innovative companies, especially startups and SMEs, are therefore increasingly using employee stock option programs such as ESOPs (Employee Stock Ownership Plan) or VSOPs (Virtual Stock Option Plan) to attract and inspire talent and retain them as long as possible. But what happens when a participating employee leaves the company? In this article, we explore the concepts of "bad leaver" and "good leaver" and explain how companies can deal with the different scenarios to make their employee ownership programs successful.
Bad Leaver & Good Leaver - what does it mean?
- Good leaver: A good leaver is an employee who leaves the company without having violated contractual agreements or legal provisions. Reasons for this may include ordinary termination, retirement or personal reasons. In such situations, the good leaver normally retains his or her acquired interest and can benefit from possible profit distributions or sales proceeds.
- Bad leaver: In contrast, a bad leaver is an employee who leaves the company under unfavorable circumstances, for example due to behavior in breach of contract, termination without notice or a serious breach of duty. In such cases, the return or forfeiture of the employee participation occurs in order to protect the interests of the company and the remaining employees.
Which legal aspects have to be considered?
- Leaver clauses: In order to regulate different scenarios in the event of employee departures, employee participation agreements often contain so-called "leaver clauses". These clauses define the rights and obligations of the employees involved and the company in the event of a departure. Leaver clauses should be formulated clearly and understandably to prevent legal disputes.
- Vesting: Another important aspect of employee stock option programs isvesting. This is a staggering of the participation rights over time, which ensures that employees only acquire their shares in full after a certain period of service or the achievement of defined targets. This prevents employees from leaving the company shortly after acquiring shares and still benefiting from the shareholding they have received.
How are employee participation programs designed?
- Transparency and comprehensibility: For the successful implementation of employee participation programs, it is important to make the contracts and regulations transparent and comprehensible. Employees should be able to clearly identify the opportunities and risks of their participation and be informed about the consequences of leaving the company. This creates trust and promotes acceptance of the participation programs. From a legal point of view, this is also required by the transparency requirement under section 307 (1) sentence 2 of the German Civil Code (BGB), according to which the provisions of the VSOP must be clear, comprehensible and unambiguous so that the beneficiary knows under what conditions and in what amount he is entitled to payment.
- Balanced arrangements: The arrangements for good leavers and bad leavers should be balanced and take into account both the interests of the employees and those of the company. This can be achieved, for example, through staggered shareholdings, an appropriate vesting period and fair leaver clauses. A good balance between the needs of employees and the goals of the company contributes to the satisfaction and motivation of the workforce.
When are leaver clauses invalid?
- Unreasonable Discrimination: Leaver clauses may be invalid if they lead to unreasonable disadvantage for employees. This would be the case, for example, if a good leaver is deprived of all shareholdings or if a bad leaver is threatened with loss of shareholding even for minor breaches of duty.
- Violation of statutory regulations: Leaver clauses can also be invalid if they violate statutory regulations. This may be the case, for example, if the clauses violate the General Equal Treatment Act (AGG) or the Dismissal Protection Act (KSchG).
- Unclear provisions: Finally, leaver clauses may be invalid if they are worded in an unclear or incomprehensible manner. This can lead to legal uncertainties, so that the clauses cannot be enforced in the event of a dispute.
Difference of leaver clauses in ESOP and VSOP.
ESOP and VSOP are employee stock ownership plans in which leaver clauses can be used. Under ESOP, employees are given the right to acquire real shares in the company at a later date, usually at a predetermined price. In the event of an employee leaving the company, ESOP leaver clauses can regulate what happens to the options acquired or not yet exercised.
VSOPs are now even more popular, as they make it easier to circumvent bureaucratic and tax hurdles. Under VSOPs, employees receive virtual shares that are paid out in cash when the company is sold or profits are distributed. Leaver clauses in VSOPs may contain similar provisions to those in ESOPs, but they relate to how the virtual shares and potential payouts are handled. In both cases, it is important that the leaver clauses are clear, fair and balanced to protect the interests of all stakeholders.
Summary
Employee share programs offer companies a good opportunity to attract, retain and motivate employees. However, dealing with good leaver and bad leaver situations is a particular challenge. Careful and balanced drafting of employee participation agreements, especially of leaver clauses and vesting provisions, is therefore essential to maintain the attractiveness of the programs and minimize legal risks.
ESOP-Direkt supports companies in the design of employee participation contracts and advises on the implementation of leaver clauses and vesting regulations or designs them according to the company's wishes.
Particular emphasis is placed on the balance and fairness of the regulations in order to take appropriate account of both good leaver and bad leaver situations. This contributes to employee satisfaction and loyalty, promotes a positive working environment and minimizes the effort required on both sides.
Disclaimer: The contents of the information offered at esop-direkt.de do not constitute legal advice. If you require a legal review of your individual case, please contact our specialized team: beratung@esop-direkt.de
