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‘Bad Leaver’ Forfeits £1.7 Million Share Options

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

In a ruling which underlines the vital importance of strict compliance with the letter of severance agreements, a senior investment manager has forfeited his right to £1.7 million in share options after the High Court found that he had breached the duty of fidelity he owed his employer.

The employee had breached the terms of his contract by, inter alia, assisting in the establishment of a business in competition with his employer and thus had to be viewed as a ‘bad leaver’ who was not entitled to exercise his rights under the compromise agreement that terminated his employment, the court ruled.

During more than seven years working for the same company, the employee had built up a deferred entitlement to £1.7 million in share options. However, on the termination of his employment prior to the vesting date, his entitlement depended on whether he was viewed as a ‘good leaver’ or a ‘bad leaver’.

A compromise agreement was reached under the terms of which the employee was to be treated as a ‘good leaver’. He was placed on garden leave for three months, during which he was paid his full salary before taking employment with a rival business which he had helped to establish.

The court ruled that the employee had been in repudiatory breach of his contract and the terms of the compromise agreement by assisting in the launch of the competing business and in helping that business to recruit a former colleague who had reported to him in his previous employment. The serious breaches of his obligations to his employer ‘would have warranted instant dismissal’ and meant that, as a ‘bad leaver’, he was not entitled to the benefits conferred by the compromise agreement.

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