Good Idea or Bad Idea?
unusual for a critical employee to ask the
owner for stock in the company, or for an
owner to believe that providing stock to a
key employee is appropriate, and maybe
even necessary, to keep the employee.
For a restaurant that wants to keep a great
chef, or any business that wants to retain
an effective manager of operations, giving
stock could look like an attractive way of
retaining the employee while enhancing
the employee's motivation as an equity
partner.
However, business owners should
understand that there are very significant
legal duties owed to minority shareholders,
uncommon for minority holders to flex
their legal muscles, alleging that majority
owners have violated any number of their
legal duties. That is why small business
owners are well advised to consider
other means of rewarding, retaining and
motivating their top talent.
Majority owners have legal duties of
loyalty, good faith and honesty in dealing
with minority shareholders. These duties
have been interpreted by the courts to
impose a variety of obligations on majority
owners. As a result, minority owners have
certain rights that ordinary employees do
not have when, for example, the majority
owner sells the company, terminates
the shareholder-employee, decides to
go out of business, or takes monetary
or other benefits (often called corporate
opportunities) that are not offered to all
stockholders.
The courts have imposed a number
of disclosure obligations relating to
certain business events and decisions.
For example, most states require that
owners provide shareholder-employees
with certain types of business information,
including periodic financial information,
in connection with their stock ownership.
It should be noted that experienced
legal counsel can help devise creative
ways to retain and motivate key employees
without endangering the business, or
unduly restricting the owner's discretion
to operate the business as he or she deems
appropriate.
Owners might retain employees
through the carefully crafted use of
incentives such as:
the employee's or the company's
performance;
benefits;
expense allowance; auto insurance and
travel expense reimbursements;
means of the business owner.
even value low-cost or no-cost solutions
that give them more public notoriety or
credit, such as touting the name of the
employee on websites, printed materials
and signage.
No doubt, there are certain business
owners who do feel they have no choice
but to give stock to key employees.
(Unfortunately, some of my clients who
have done so later said they should have
listened to me.) These are some of the
things we recommend if stock is given to
an employee:
terminated, the company can buy
back the stock, usually at a formula
pre-determined in a stockholder's
agreement. (I advise using book value
or some other formula as opposed to
fair market value.)
back the stock at a lower price from
any employee/stockholder who is
terminated for cause.
right to transfer the stock without the
consent of the majority of stockholders.
This may become especially important
if the employee gets divorced.
Rudolph Friedmann LLP and chairman of the
board of directors of the Associated Builders
and Contractors of Massachusetts. He advises
businesses on partnership and corporate law
issues, as well as in matters involving real estate,
construction and employment law.
92 State Street
Boston, Massachusetts 02109
617.227.0313 Fax
jrudolph@rflawyers.com