Parting with any employee comes with a host of dangers and pitfalls for an employer. These liabilities are increased when the exiting employee holds ownership in or options to own the employer’s company. Especially for smaller businesses, restricting its ownership from departing with employees is essential to continuing to operate smoothly and effectively. But in cases where an employee has unexercised stock options in his or her employer’s company, how can the company ensure that shares of its ownership do not walk out the door with a former manager? A well-crafted severance agreement is the answer.
By taking the extra time to craft a comprehensive severance agreement, rather than an off-the-shelf template, a company can extinguish its former executives’ interest in the company. Because a grant of stock options is a part of the employment contract, it is essential that the severance agreement clearly and unambiguously terminate the employment agreement itself. Recently, in the case of MacDonald v. Jenzabar, Inc., 92 Mass App. Ct. 630 (2018), the Appeals Court for the Commonwealth deemed a former manager’s rights to both unexercised stock options and unclaimed preferred shares in his employer’s company to be extinguished by a broad general release by his employer.
Broad Release Term Specifically Terminating Employment Agreement
Among other provisions the general release at issue provided:
“As a material inducement to the Company to enter into this Agreement, you agree to fully, irrevocably and unconditionally release, acquit and forever discharge the Company…from any and all claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses (including, without limitation, attorneys’ fees and costs) of any nature whatsoever, known or unknown, suspected or unsuspected, arising on or before the date of this Agreement and/or relating to or arising from your employment and your separation from employment with the Company and/or any of the Released Parties, including, without limitation, … any and all claims under the [employment agreement].”
Integration Clause Terminating and Superseding All Previous Agreements
In addition to this general release of claims, the severance agreement contained a merger and integration clause:
“This Agreement constitutes a single, integrated contract expressing the entire agreement between you and the Company and terminates and supersedes all other oral and written agreements or arrangements; provided, however, that you understand and agree that the terms and provisions of the Confidentiality Agreement are specifically incorporated into this Agreement, and you remain bound by them.”
Stock Options Arise Out of Employment Agreement and Are Extinguished with Its Termination
Because the Court found that the plaintiff’s stock options and preferred shares arose from his prior employment, these provisions were found to be unambiguous and conclusive. Of note, the Court specifically observed that in addition to “generally [extinguishing] any and all agreements, of any nature whatsoever….[it] also expressly extinguishes the employment agreement.” Therefore, absent any language to the contrary, this contract provision is sufficient to extinguish the employment agreement and consequently the preferred shares and stock options arising therefrom.
Going forward, an employer seeking to extinguish the unvested stocks and stock options in its departing managers, would be advised to consult with an attorney to craft a broad severance agreement with specific reference to the operative agreements relating to employment. Such consultation will allow the employer to restrain the ownership of its business while also crafting exceptions for contracts executed in the employer’s favor. With the right severance agreement, an employer can make sure that its stock stays in-house while continuing to be protected by previously executed non-competes and confidentiality agreements.