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Tag Archives: acceptance

July 8, 2014

Restrictive Covenants in Awards

Today I look at recent litigation relating to the use of non-compete provisions in award agreements.  The case (Newell Rubbermaid v. Storm) involves an employee, Sandy Storm (yes, that’s her real name), of Newell Rubbermaid.  Storm was responsible for the sale of infant and juvenile products (sold under the Graco brand) by Newell Rubbermaid to Target. In 2013, Storm signed an RSU agreement that included a number of post-employment restrictive covenants (e.g., relating to confidentiality, use of trade secrets, and non-solicitation) that effectively prohibited her from competing with Newell Rubbermaid.  In 2014–you guessed it–she resigned from Newell Rubbermaid to work for one of their competitors (Artsana) selling infant and juvenile products (including to Target).

What is interesting here is that the Delaware Chancery Court agreed that the restrictive covenants are enforceable and issued a temporary restraining order against Storm.  In today’s entry, I discuss some other aspects of the case that I think are interesting.

An Online Agreement and Acceptance

The agreement was distributed online and Storm consented to it with an electronic signature.  The court did not seem to view this any differently than if the agreements had been in paper format and she had manually signed them, saying “Agreements may, of course, be made online.”

You Really Should Read All Those Online Agreements

Storm had not read the agreement, so she didn’t know about the restrictions.  She knew that other employees had been asked to sign separate non-compete agreements, so, before resigning, she checked several other sources for prohibitions against working for a competitor (including her personnel file and the company intranet) and didn’t find anything. But she didn’t think to check her RSU agreement. And who can blame her–she thought that agreement related solely to her RSU award, which she was going to forfeit anyway because it wasn’t vested, and she’d signed RSU agreements in 2011 and 2012 that didn’t contain these provisions.

The court didn’t care, saying “Storm is understandably unhappy that she did not read the 2013 Agreements…She altered her post-employment rights in a manner she appears to regret now, but it was her choice to modify her rights without fully investigating the terms to which she agreed.” Harsh! Something to keep in mind the next time you accept an online service agreement without reading it.

Enforcement Went Beyond Forfeiture of the Award

What we typically see with non-compete provisions in awards is that the award is forfeited (or, if vested, clawed back) if the employee violates the provision.  The employee essentially has a choice of (A) keeping the award or (B) competing. That wasn’t the case here.  The restrictive covenants apply regardless of whether the award is forfeited.  In fact, the award had not yet vested by the time Storm terminated, so she forfeited it regardless of where she went to work after leaving Newell Rubbermaid.  The question is not whether she gets to keep the award but whether she can work for Newell Rubbermaid’s competitor at all. It’s a lose-lose situation for her; she already forfeited the award and now she’s out of work.

New Possibilities and Challenges

This certainly opens up some new possibilities for award agreements.  Mike Melbinger of Winston & Strawn and blogger at CompensationStandards.com thinks, given Storm’s level in the organization and access to sensitive information, this particular scenario might even withstand a challenge in California.

But a provision like this would be a darn good reason for an employee to refuse to accept an award. Storm’s future employment opportunities were limited as soon as she accepted the award agreement (without even reading it!).  Enforcing acceptance of award agreements is already a challenge (see the NASPP webcast “Is Silence the Answer? Acceptance of Grant Agreements“), giving employees a legitimate reason to decline them makes this process even harder.

Moreover, a key consideration for the court was that Storm checked a box labeled “I have read and agree to the terms of the Grant Agreement,” and clicked a button labeled “Accept.”  The court reviewed screen shots of the page that Storm used to accept the agreement and emphasized this in its decision.  I’m not sure that the court would have sided with Newell Rubbermaid if Storm hadn’t had to voluntarily take action to accept the award.  And many companies don’t get serious about enforcing acceptance until awards are about to vest.  Storm’s award hadn’t vested yet; if Newell Rubbermaid had taken that approach, Storm would probably be happily working at their competitor today.

For more information on this case, see the McGuireWoods alert, “Include Restrictive Covenants in Equity Grants? Why Not?”

– Barbara

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July 1, 2010

RSUs and Grant Acceptance

Restricted stock units and awards carry a unique risk when it comes to grant acceptance. It’s easiest to understand this risk in contrast to stock options. In most countries and situations, the taxable event on a stock option is the exercise. Employees must personally take action in order to exercise a stock option, which gives companies the opportunity to have their undivided attention when it comes to grant acceptance and simply prevent exercise until the grant has been signed. Restricted stock awards and units, on the other hand, are taxed on either the vest date or even at grant (depending on the country and circumstances). For the purpose of simplification, I’m going to focus on RSUs granted in the U.S. that do not have accelerated or continued vesting after retirement.

Policy #1: Time’s Up!

Some companies take a conservative approach to this issue by actually enforcing a grant acceptance requirement with a policy under which employees forfeit their grants if acceptance isn’t completed within a specific timeframe. In this approach, the highest risk is in ensuring adequate communication regarding the timeframe and consequences of not accepting the grants. In addition to including a warning in all communications leading up to the grant, it’s a good idea to also send out reminders to employees as they approach the deadline for acceptance.

Policy #2: It’s Yours Whether You Know it or Not

Some companies default to the philosophy that grants will continue to vest regardless of the grant acceptance status, even if they have a policy that theoretically requires grant acceptance without actually enforcing it. Hopefully, this is a well thought-out policy and not just a head-in-the-sand reaction to the issue of grant acceptance. For example, it could be that the comany’s legal team concluded that allowing shares to vest before the terms and conditions have been accepted poses less risk to the company than cancelling unaccepted grants. Regardless of the reason behind adopting this policy, the best way to make it effective is to make sure that grant documents, communications, and company policy accommodate how tax withholding is executed. The smart approach is to have a default tax withholding method which does not require action by the employee such as share withholding. Another advantage of share withholding over other methods is that, in the event the employee ultimately wants to decline the grant, the odds of being able to “unravel” the vest are much higher.

Policy #3: What?!

The riskiest approach of all is to ignore the issue until it’s too late. Of course, it’s entirely tongue-in-cheek to call this a policy at all. A company might fall into this situation because of poor planning, inadequate documentation, or a sudden increase in the number of RSU recipients. This could lead to a situation where taxes are due, but the company has no way to collect them because there either isn’t a default tax withholding method, or the default isn’t possible without action from the employee. Companies that find themselves in this position must scramble to get grant acceptance and/or collect taxes, possibly delaying the tax remittance or actual delivery of shares. Because it’s likely not possible to consider a late delivery of shares as a delay in constructive receipt of the shares in, delayed tax remittance could result in penalties incurred by the company.

Best Practices at the NASPP Conference

You can always pick up great tips for the best practices in equity compensation at our Annual Conference! This year, for information on grant acceptance and other hot issues in stock plan administration policies, check out the “Grant Practices: The Good, the Bad and the Outright Dangerous” session. If you haven’t already, register for our 18th Annual NASPP Conference now!

-Rachel

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