Employee Stock Ownership as long as Employee Stays in the Company, What Kind of Nonsense is This?

Question

Recently a friend of mine has received a stock buy offer from its company. The company offered to sell a specific amount of the company shares with a nice discount rate, because he was in a critical and irreplacable position. Everything is fine up to this point.

However, there is a ridiculous clause in the agreement: without any specific lime limit, if the employee quits job or the company fires him (event after 10 years), he will be required to, enforced to sell its shares back to company!

Is such a clause legal or against the priciple of private ownership? or can this be called stock buy offer at all? I guess you did not see such a nonsense before. Thanks.

Answer 1

This is neither unusual nor illegal, assuming that the buyback price is specified in the agreement. If your friend does not wish to take advantage of the "nice discount" he can decline the deal, and decide for himself whether he wishes to buy shares without restriction, at the market rate.

(It would be interesting to know what happens if he sells his shares and then leaves the company. I am fairly sure the agreement will cover this, but requiring an ex-employee to buy shares and then give them to the company could be considered unconscionable. That might be worth asking a lawyer about).

Answer 2

Such agreements are extremely common

In fact, companies can issue redeemable shares to the market which can be bought back at any time from the current owner. Such shares normally trade at a discount to the company’s ordinary shares.

Of course, companies can also buy back their ordinary shares on a voluntary or compulsory basis anyway.

Unpacking your friend’s offer: he is buying the shares and selling the company a perpetual option to buy them back all wrapped up in one contract. That’s all normal stocks and securities stuff and part of the reason why he’s getting them at a discount.

Answer 3

can this be called stock buy offer at all?

Not really. However, that misnomer does not strike the legality of that agreement.

Under contract law, labels in isolation really have no meaning or relevance. They become relevant or meaningful only with respect to the rest of the language of the contract. In the agreement you mention, the common meaning of ownership is superseded by the conditions and the intent that can be ascertained from the contract altogether.

There are better terms (such as holdings or loan) to preempt confusion about the fact that the company retains the ability to recover the stock. That ability is evident from the company's contractual right to force the buyback in the event that your friend no longer works there.

Regardless, during the time the stock is in your friend's possession, he benefits from that possession just like any actual owner of a stock of same characteristics. For instance, in the case of dividend paying stock, your friend earns the dividends without an obligation of reimbursement once he no longer works at that company (or at least you did not specify otherwise). Similarly, your friend's stock might grant voting rights, which are inherently irreversible once these are exercised.

Something your friend should ascertain from the contract and the characteristics of the stock is whether the stockholder is allowed to transact it (think of selling it or short-selling it). Although unlikely, there might also be financial derivatives of which the underlying asset is that stock. Short of actual ownership of stock, your friend might still be able to perform trades as an owner would, and then buy the same quantity of shares in the event that he needs to return them to the company.