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Something about Corporate reforms that bothered me a lot were the proposed changes to introduce Employee Stock Options Scheme for start ups and private companies through a Companies Amendment Ordinance 2020 (which has now lapsed). It’s good intentioned, but naive. A thread;
Employee Stock Options (ESO’s) as most people are aware, is a right given to an employee to buy shares at a discount or a pre-determined price in a company after a couple of years in employment. The ESO helps to keep employees motivated to generate equity rather than a salary.
Our Company laws didn’t envisage Stock Options for private limited companies or start ups, which was stupid and regressive, considering its a great option for start ups to lure skilled personnel as employees when they can’t afford to pay them early on.
Now that the SECP, in ostensibly spearheading the ease of doing business push, introduced legislative amendments to make ESO’s available for start ups. But what’s the legal remedy when companies refuse to issue shares to an employee when the option is exercised or vests?
Private companies are generally run either as family businesses or by “Seths” which are highly centralised. They’re also much less on the SECP radar, as compared to listed/public companies. In such scenarios it’s highly likely for companies to be delinquent towards employees.
This can also apply to start ups that are looking to cut costs and may not honour ESO obligations and issue shares to employees. In this scenario, all an employee can do is go to the Civil Court for breach of contract (where you usually abandon all hope, before entering.)
The reality is that a civil court is filled with judges who have little appetite or understanding for commercial matters such as ESO schemes, in which vesting and strike issues pertaining to the options are more appropriate for specialised company judges or SECP officials.
Thus in the purgatory of civil procedure, which shall take years to resolve, without even discounting appeals, an employee’s chances are dead in the water.
If true ESO’s are to followed in the right spirit, then the employees should ostensibly be treated as shareholders in waiting and their first point of redress should be a Company Judge in the High Court and not civil court judges who
don’t have training to adjudicate such issues
don’t have training to adjudicate such issues
One can’t take these disputes to the SECP because it’s a regulatory and not a judicial forum, and ESO issues require formulating evidence, listening to arguments and fact finding, something which it can do in only limited scenarios.
Which ties into the ubiquitous point that until the State makes the process of adjudicating contract breaches through efficient judges, better laws and a speedy procedure, our ease of doing business mantra is hollow and pointless.
Any legislative endeavours for ease of doing business must take into account dispute resolution realities on ground, something that lawyers/experts fail to factor in.
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