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Issuing Shares to Employees

So, your business is going well… really well.

You have some great key employees who have really contributed to your business over the years.

You decide you want to acknowledge that contribution by issuing them shares in your company, both recognising their contributions to date and ensuring that they have a vested interest in how well the company goes in the future… or so you think.

But what happens if that relationship breaks down? Have you thought about what will happen? Can you fire the employee and get the shares back? Or will they be entitled to keep their shares in the company forever, or until you buy them out?

The matter of MacLean v RC & MF Holdings Pty Ltd [2011] VSC 447, a recent case in the Supreme Court of Victoria, shows that protecting your company’s interests when issuing employee shares is not as easy as it may seem.

In that case, the CEO of RC & MF Holdings Pty Ltd, Mr MacLean, was entitled, under his employment agreement, to have shares issued to him once specified financial thresholds were met by the company. Despite this, the company issued shares to him prior to those thresholds being reached.

The company then began to suspect that Mr MacLean was misappropriating funds. After investigating, they dismissed him summarily, stating that he had breached his employment agreement, and subsequently cancelled the shares they had issued to him.

Luckily for RC & MF Holdings Pty Ltd, they had documentation in place, including an employment agreement, which protected the company, as it stated explicitly what the employee was entitled to in regard to the shares and when the company was able to summarily dismiss him.

The Court found:

1. That the company was entitled to dismiss Mr MacLean summarily, as it was contemplated in the employment agreement, and the concerns in relation to his misappropriation of funds were found to be correct; and

2. That the company did not act oppressively in relation to cancelling the shares as the employee was not yet entitled to them as the threshold had not been met.

But what if the company had not had documentation in place that had protected them?

Without clear documentation which states how and when shares will be issued and/or cancelled, as well as an employment agreement which outlines what an employee may be dismissed for, the situation may have been very different, and the company may not have been successful.

When hiring employees you need clear complying employment contracts. If employees are also to be issued shares, it is vital to have the correct documentation in place. It is also essential to comply with that documentation if, or when, something goes wrong.

For further information, please contact the Workplace Law Team or Commercial Business Team