Terminated employees and unvested shares

Singapore case showcases importance of clear share plans when employees are dismissed

Terminated employees and unvested shares

In SAIS Ltd v. Hardman, Michael Jon [2022] 2 SLR 1217, a Singapore court dealt with an appeal concerning a claim for damages arising from the non-delivery of shares that were granted to employees as part of an employee share incentive scheme. One of the issues raised was whether termination of employment could deprive an employee of their unvested shares, even though the termination was only days away from the vesting of the shares and from a change of control event which would have accelerated the vesting. The court departed from the views of the trial judge and answered this question in the affirmative.


Hardman (H) and Finck (F) were employees of the second appellant (A2), and A2 was a subsidiary of the first appellant (A1). As part of an employee share incentive scheme, H and F were granted a number of restricted share units (RSUs) in March 2019 and September 2018, respectively, which were due to vest in three parts between 2019 and 2021.

Two key provisions under the RSU Plan were:

• Section 4.3, which provided that once a unit “vested,” A1 was obliged to “settle” or “make payment” on those units “within [15] days of the Vesting Date and which date shall not, in any event, extend beyond Dec. 15th of the third year following the year of grant for the particular [unit].” A proviso to this section also provided for a moratorium which prohibited employees from selling the shares they received under the RSU Plan for six months.

• Section 5.3, which provided that, upon a “Change of Control” event, all units granted were deemed as having “vested immediately” prior to the event, irrespective of their scheduled vesting dates, and would also become “payable effective immediately” on the same date. “Change of Control” was defined in the RSU Plan as including the sale of all or substantially all of A1’s or its subsidiary’s assets, or an individual acquiring a controlling interest in A1.

The following events took place:

• On 6 September 2019, A2 terminated F's employment just days before the first one-third of his units vested on 21 September 2019. A2 and F agreed that, notwithstanding the termination, the first one-third of his RSUs would still vest as scheduled. However, F never received these shares.

• A1 entered into an agreement to sell the group's wine and spirits business housed in one of A1's subsidiaries. The sale was completed on 13 September 2019.

• The first one-third of H's RSUs vested and the shares were granted to H in October 2019.

• H was asked whether he would be willing to accept 72,590 units in lieu of his cash bonus for 2018 as A2 was short on cash. H agreed on 9 December 2019.

• In January 2020, H was notified that he would be made redundant. H asked to resign and was allowed to do so. On 29 January 2020, A2 issued a letter setting out the terms of his resignation, which also recorded that the additional RSUs would be issued and vested at the end of February 2020.

• On 19 February 2020, A1 announced that it had filed an application to be delisted from the Toronto Stock Exchange Venture Exchange and its last trading day was 16 March 2020.

• Only on 20 September 2020 did A1 issue 205,669 of its shares in H's name. These represented the remaining two-thirds of his RSUs and the additional RSUs which had vested. It was unclear whether H had accepted them.

H and F brought an action against A1 and A2.

H claimed for damages for the failure to settle the remaining two-thirds of his RSUs upon the sale of the wine and spirits business (which he argued constituted a Change of Control event and accelerated the vesting of shares in accordance with section 5.3) and his 2018 cash bonus or damages he suffered from the failure to settle the additional RSUs upon the sale.

F claimed for damages in respect of all of his RSUs or damages in respect of A1's failure to settle the first one-third of his RSUs, which he was allowed to retain notwithstanding his termination.

The court's findings

The trial judge found in H's and F's favour. H was awarded damages for A1 and A2's failure to settle both the remaining two-thirds of his RSUs and the additional RSUs upon the sale of the wine and spirits business. F was similarly awarded damages for A1 and A2's failure to settle all of his RSUs.

A1 and A2 appealed.

The Appellate Division of the High Court dismissed the appeal against H, but partially allowed their appeal in respect of F.

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H's claims

Regarding the remaining two-thirds of H's RSUs, the trial judge found that the completion of the sale of the wine and spirits business on 13 September 2019 constituted a Change of Control event, and this was not disputed on appeal.

A1 and A2's main argument was that A1 had complied with its obligations under the RSU Plan by issuing shares to H on 20 September 2020 (notwithstanding an earlier Change of Control event) as section 4.3 overrode section 5.3 and they were thus entitled to settle the vested shares by 15 December of the third year following the year of grant.

The trial judge found that section 5.3 accelerated the vesting of share units upon the completion of the sale of the wine and spirits business and A1 was required to make immediate payment on units deemed vested. H was awarded damages calculated using the price of A1’s shares on 13 September 2019.

A1 and A2 further argued that the moratorium in section 4.3 meant that H would only be allowed to sell his shares six months from the time they vested. The courts disagreed with this interpretation and found that the moratorium did not apply in cases where shares were provided pursuant to section 5.3 or where there was a specific agreement concerning the vesting of the shares. H was entitled to monetise the shares immediately upon vesting.

As for the cash bonus, the trial judge disallowed H's claim for his 2018 cash bonus as it was contrary to parties' agreement to substitute the cash bonus with share units. However, H was allowed to recover damages for A2’s failure to provide the shares in respect of the additional RSUs, calculated based on the price of A1's share by the end of February 2020.

The Appellate Division of the High Court agreed with the trial judge's findings and dismissed the appeal.

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F's claims

The trial judge allowed F to claim for the entirety of his RSUs for the following reasons:

• The agreement to sell the wine and spirit business was entered into on 29 July 2019 when F was still an employee, though it was completed after the termination. As the term “Change of Control” provided that a sale could be effected by a “series of transactions,” the trial judge found that, on 29 July 2019, section 5.3 had already been engaged.

• it could not possibly have been the intention of the RSU Plan that A1 or its related companies could unilaterally extinguish an employee’s entitlement under the plan by simply terminating his employment. The judge also considered that F's employment was terminated just days before the Change of Control event took place, which would have triggered section 5.3 and caused all of his unvested shares to immediately vest.

On appeal, it was not disputed that F was entitled to damages in respect of the first one-third of units he had been promised. The main issue was whether F was entitled to damages in respect of the entirety of his RSUs. The Appellate Division of the High Court disagreed with the trial judge's reasoning on both points. Regarding the first point, the court found that the trial judge erred in finding that section 5.3 had already been engaged when F was still an employee. While the term "Change of Control" could be brought about by a series of transactions, a Change of Control event was a single event and was not itself a series of events.

Regarding the second point, there was nothing in the RSU Plan to restrict the right of A1 or its related companies to terminate F's employment, although "the right must be exercised bona fide and not with a view to specifically deprive the participating employee of his benefits under the RSU Plan." On the facts, there was no suggestion that the termination of F's employment was done in bad faith and in anticipation of the completion of the sale of the wine business.

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Key takeaways

This case provides useful pointers for employers in drafting their share incentive plan, which is often complex. A key point is to get the plan right and clear – a precedence clause is helpful to determine which term prevails over the others and the weight that is to be applied to the various documents forming the plan.

It is also particularly useful to note that an employer’s right to unilaterally terminate an employment contract with notice or salary in lieu of notice in Singapore is not restricted by the employee’s contractual right to other benefits. That said, the termination must not have been done in bad faith.

Proper communications and records leading up to the termination are therefore crucial if the termination is challenged, which is likely if the employee's contractual benefits are impacted.

Fatim Jumabhoy is the Asia Head of Employment, Pensions, and Incentives and Managing Partner of Herbert Smith Freehills in Singapore. Nurul Ayu Fajarani is an associate in the Employment, Pensions, and Incentives practice at Herbert Smith Freehills in Singapore. Herbert Smith Freehills LLP provides access to Singapore law advice through its Formal Law Alliance with Prolegis LLC.

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