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Many companies devise alternative remuneration plans to attract and retain their employees. One such is the Stock Option Plan (SOP), under which employees may receive options allowing them, in time, to acquire their employer’s shares at a pre-set price. That exercise right usually lapses if the employee leaves the company. Belgian tax law requires the employee to pay withholding tax immediately (8.5% or 17% depending on the case), calculated on the exercise price of the underlying shares. To pay it, the taxpayer must use their own funds, take out a loan, or turn to more imaginative mechanisms offered by some financial institutions. Among these, the HESOP contract (Hedged Stock Option Plan) has recently drawn the courts’ attention.
The HESOP mirror-option contract is an independent contract
The HESOP contract is independent of the employer-employee relationship, concluded between the employee and the bank. Under it, the employee issues a number of options similar to those received from the employer and sells them to the bank. In return, the bank pays the client the equivalent of the withholding tax due. As holder of these mirror options, the bank may, until a certain date, exercise them against its client and require delivery either of the underlying shares or their cash equivalent. To meet its obligations, the taxpayer keeps enough shares or cash in portfolio; failing that, it must exercise the options granted by its employer.
Bank and client liability when the employee leaves
Difficulties arise when the employee has left the company that granted the original options without informing the bank and without using any contractual option to buy back the HESOP contract and cancel the operation. In that case, the bank ends up claiming what it is owed at maturity by exercising the options granted to it. If the share price is high, the amounts can be substantial for the client. The former employee’s diligence towards the bank is therefore crucial.
The decision: the mirror-option contract is independent, and the client must warn the bank on leaving
The Brussels Court of First Instance recently upheld a bank’s claim ordering its client to pay a substantial amount under the HESOP contract. The client, who had left the company without warning the bank, invoked the interdependence of the employment contract with stock-option plan and the HESOP contract, and the lapse of the latter given that the original options could no longer be exercised after his departure. The court held that the two contracts are indeed distinct: they involve different parties, have a similar but distinct object, and are concluded on different grounds. The HESOP contract is concluded to allow the client to pay the withholding tax without drawing on cash or resorting to credit. The court also held the HESOP contract was in no way abusive, given its optional nature, the possibility left to the client to buy it back in good time, and the obligations incumbent on him, notably to warn the bank of his departure.
This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.
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