Can you amend the ESOP policy?

We have written earlier, the 'Basics of ESOPs' and the concepts of granting, vesting and exercising ESOPs, and discussed on whether we can delay the exercising of ESOPs. In this article we shall discuss the law on modification of the terms of ESOPs.

Rule 12(5) of the Companies (Share Capital & Debentures) contains the law relating to modification of ESOPs. A company (other than a listed company) can modify the terms of ESOPs where employees have not exercised the options, by passing a special resolution (i.e., where votes in favour are not less than three times the number of votes cast against a resolution) in a general meeting. The procedure is standard: for conducting a special resolution, the company would have to issue a notice disclosing, among other things, the rationale therefor, and the details of the employees who are beneficiaries of such variation. Such a variation shall also not be prejudicial to the shareholders.

In a more recent case before the Hon’ble Bombay High Court between Mitsui & Co Ltd vs. Naaptol Online Shopping Pvt. Ltd. & Ors. (unverified), the Hon’ble court allowed the interim application seeking to amend a section 9 petition of the Arbitration and Conciliation Act,1996 which had inter alia sought a relief to restrain the respondent, i.e., Naaptol from passing a resolution for amendment to the ESOPs plan.

In the interest of further reading around the concept of ESOPs, we are sharing a synopsis of 2 case laws around the concept of ESOPs. In Rajnish Kohli vs HCL Technologies, the appellant sought a mandatory injunction for the grant of 1950 Shares of the respondent company to the appellant under the Employees Stock Option Plan (“ESOP”). The appellant was offered a certain number of ESOPs during his time an employee with the respondent company. The appellant alleged that the offer was in terms of the letter dated November 8,1995 which was subsequently revoked and substituted by the offer letter dated January 20, 1997, which inter alia specified that the entitlement of the appellant in the ESOPs was to be enforced after 30 days of the Initial Public Offering (“IPO”) of the respondent company. The appellant alleged that despite numerous letters to the company to exercise the granted ESOPS the company had declined by providing varied reasons. However, the respondent company contended that the appellant was already aware about the withdrawal of the ESOP plan as he had exercised options granted by a subsequent ESOP plan. Further the respondent company contented that he ceased to be an employee in April 1997 during the entitlement of ESOP. As per the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 as amended w.e.f 30.6.2003, ESOPs cannot be given to the appellant. The Hon’ble Delhi High Court did not hold in favor of the appellant and observed that “Where a person by his own act fails to take requisite steps which he ought to have taken by which such person would have come to know of a fact, then in law the necessary knowledge is imputed to such a person and he is deemed to have such knowledge…”

In M/s. Arshiya Limited vs Amit Gupta & Anr, the defendant no.1 was a senior management personnel in the plaintiff’s company. An ESOP scheme was introduced by the plaintiff company. The defendant no.1 accepted the options and consequently the same were also allotted. Subsequently, plaintiff allegedly found defendant No. 1 to be in breach of his terms of employment by being guilty of misconduct and accordingly, his services were terminated. The main contention of the plaintiff in this case was that the defendant should not be allowed to exercise the rights vested under the options. The Hon’ble Delhi High Court did not hold in favour of plaintiff and observed that “As regards the claim that the allotment of shares are 'fruits of fraud', it must only be noted that such grave allegations cannot be accepted on face value. The same would require adjudication. Although the termination letter levels allegations which hint misconduct, the same would have to be proved by the Plaintiff. No communication has been placed on record to indicate that during the course of employment spanning three years, Plaintiff- company ever issued any show-cause notice upon Defendant No. 1 or complained about his poor-performance. There is also no material placed on record that would show that prior to termination, any enquiry was held, affording an opportunity to Defendant No. 1 to defend himself on the charges levelled against him.”