We do a deep dive into the manner of treatment of unvested Employee Stock Options in addition to vested and unexercised Employee Stock Options upon liquidation of the concerned entity granting such Options or winding up of the scheme/plan under which the Options are granted.
Summary: Unvested or vested and unexercised Employee Stock Options (“ESOP”) may be sold in the secondary market or distributed among the concerned employees as is recommended by the stipulated authority in respect of a listed company subject to the ESOP Regulations (as defined hereinafter). Alternatively, the ESOPs may be cancelled with/without prior intimation and the option of exercise to the employees as is detailed and structured under the concerned scheme/plan governing the grant and exercise of the ESOPs.
TREATMENT OF EMPLOYEE STOCK OPTIONS UPON LIQUIDATION
The following are the modalities for the treatment of ESOPsupon the dissolution/winding up of the concerned entity having granted the ESOPs or winding up of the scheme/plan under which the ESOPs are granted:
- Sale in Secondary Market/Distribution to Employees:
The entity granting the ESOPs or the trust administering the ESOPs may undertake to sell the ESOPs that have vested and not been exercised or those which have not vested and/or remain in the ESOP pool via the secondary market.
Further, in the event of winding up of the schemes being implemented by a company through a trust, any excess monies or shares remaining with the trust after meeting all obligations are to be utilised towards the repayment of loan or by way of distribution to employees as recommended by the compensation committee as constituted in pursuance of Regulation 5 of the SEBI (Share Based Employee Benefits) Regulations, 2014 (“ESOP Regulations”).
Note: The ESOP Regulations are applicable only to such an entity that operate a scheme as contemplated under the ESOP Regulations and whose shares are listed on a recognised stock exchange. Thus, while there are no operative restrictions on an unlisted company undertaking the measures detailed hereinabove, there are no regulatory processes instituted in such respect.
- Cancellation of ESOPs:
The concerned ESOP scheme/plan adopted for the grant and exercise of the ESOPs may also provide for procedures to be implemented in the event of dissolution or winding up of the concerned entity.
Such procedures may stipulate the issuance of a notice by the entity to the employees with respect to the proposed winding up of the entity and providing for a time period within which the ESOPs must be exercised by the holders, subsequent to which the ESOPs are to expire with the shares to the ESOP pool maintained by the entity.
Alternatively, the ESOP plan may also provide for concurrent termination or termination immediately prior to the winding up of the entity without any prior notice necessitated to the ESOP holders.
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