Share plans and proprietary estoppel: be careful what you promise

A recent High Court decision highlights the importance of seeking legal advice when dealing with exit negotiations involving share plans. In this case, the High Court found that the CEO of Global Data plc did not exercise discretion under a share plan to allow the employee to retain and exercise his share options beyond the termination of his employment. However, the employee was still entitled to a remedy under equitable principles because of the assurances made to him

Background

Mr Dixon worked for his employer from January 2006 to December 2014. In 2011, he was granted share options in his employer’s parent company, Global Data plc. During Mr Dixon’s exit negotiations, he received verbal and written assurances from Global Data plc’s CEO that he would retain his share options. Specifically, he received a letter saying. “The 44,000 of outstanding share options will be added to your compromise settlement and will vest in line with current conditions”.

In reliance on the CEO’s assurances, Mr Dixon agreed to settlement terms under which his employment would be extended by three months beyond the initial proposed termination date, and he would be bound by post-termination restrictive covenants which would be effective after that later termination date.

A clause of the settlement agreement had the following wording:

“The Employee shall retain his entitlement to 44,800 share options in Global Data plc’s Share Option Scheme following the termination of his employment”.

When Mr Dixon attempted to exercise two tranches of his share options after he left his employer, Global Data plc argued that the options had lapsed because the necessary discretion to exercise such options post-termination had not been exercised.

Mr Dixon sought an order that he was either entitled to exercise the options or receive damages.

What was decided

1. Discretion had not been exercised under the share plan in Mr Dixon’s favour.

Although the share plan allowed Global Data plc to exercise its discretion to permit the continued exercise of options post-termination, the High Court found there was no evidence that the CEO sought to exercise such discretion.

On the facts, the High Court was influenced by the fact the CEO did not specify the basis on which the options would be exercised.

2. Mr Dixon was entitled to a remedy under proprietary estoppel instead

Although Mr Dixon could not establish that discretion had been exercised to permit continued exercise of his shares post-termination, the High Court instead found that he would have a remedy based on proprietary estoppel.

To succeed in a proprietary estoppel claim, three elements must be satisfied. There must be:

1. a clear and unequivocal assurance or representation;
2. reasonable reliance on that assurance; and
3. a substantial detriment resulting from that reliance.

All three elements were found to be present in this case.

Clear and unequivocal assurance or representation

• The CEO’s assurances were sufficiently clear and unambiguous. This was the assurance that Mr Dixon’s share options would vest in line with current conditions and that he would retain his entitlement to 44,800 options (the latter being the way in which the point was recorded in the Settlement Agreement).

Reasonable reliance on the assurance

• The High Court found that Mr Dixon’s reliance upon the assurances was reasonable, given the overall context and his understanding. The High Court reasoned it would be objectively improbable that the CEO would have offered Mr Dixon something which could practically never result in any benefit to him in circumstances where the CEO was seeking Mr Dixon to act in Global Data plc’s interests.

Detriment resulting from the reliance

• The Claimant clearly suffered substantial detriment. Primarily, he had agreed to be bound by longer post-termination restrictive covenants, which put him out of the employment market for four additional months. He had also agreed to work for the company three additional months beyond the previously proposed termination date.

Given all elements of proprietary estoppel were satisfied, the High Court decided that the Claimant would have a remedy, which was to be determined at a later date.

3. The Micklefield clause in the share plan could not defeat the claim of proprietary estoppel

Global Data plc attempted to rely on rule 14.1.4 of the share plan to bar the proprietary estoppel claim. Rule 14.1.4 of the share plan was a “Micklefield clause” (or “exclusion clause”), which are commonly included in share plans to prevent claims for loss of benefits due to termination of employment.

However, the High Court found that the Micklefield clause was not intended to protect Global Data plc from a proprietary estoppel claim, which could be distinguished from a claim for loss of benefit due to termination of employment.

Practical implications

Although each case will turn on its own facts, the case provides some important lessons for both employers and employees.

Employers

• Assurances of senior employees may bind a company even if they don’t align with the rules of the share plan: the case shows how, even when discretion under a share plan is not formally exercised in the correct way, a sufficiently clear promise may end up being enforceable via proprietary estoppel where the employee has acted in reliance on that promise to their detriment. In this case, this meant the Claimant in question was able to keep his shares post-termination. Proprietary estoppel could also provide a remedy to employees in other scenarios where an employee relies on the promise of a future benefit, so members of management need to be careful to ensure that their actions do not amount to clear and unequivocal assurances giving rise to a potential proprietary estoppel claim.
• The limits of Micklefield clauses: the case is a reminder that Micklefield clauses will not protect a company against proprietary estoppel claims.

Employees

• The need to seek legal support in settlement negotiations: the case highlights that simply referencing shares in a settlement agreement will not guarantee that an employee will be able to keep their share options after exiting a company. Employees should seek legal advice to ensure that any settlement agreement is drafted to best protect their position in light of any share plan rules.