Company Cannot Deny Employee Equity By Relying On Its Own Failure To Frame ESOP Scheme: Bombay High Court

The Bombay High Court has recently held that a company cannot rely on its own failure to frame an Employee Stock Option Plan (ESOP) to deny an employee equity that was offered as part of his remuneration package.

Justice N.J. Jamadar made the observation while dismissing Waterfield Advisors Private Limited's petition under Section 34 of the Arbitration and Conciliation Act, 1996.

The company had challenged an arbitral award directing it to allot 31,878 equity shares to its former Director (Operations), Sridhar Kurpad. “On first principles, the Petitioner company cannot be permitted to take advantage of its failure to frame employee stock option scheme,” the court ruled.

“To allow the Petitioner to now take advantage of its omission to frame a scheme, when it had made an offer of equity as a part of its remuneration package to the employees would amount to putting a premium on its own wrong.”

Kurpad joined Waterfield Advisors as Director (Operations) on August 24, 2011. His appointment letter offered him equity equivalent to 0.5% of the company's share capital in the first year, 0.2% in the second year and 0.2% in the third year. The shares were to vest in the fourth, fifth and sixth years respectively, subject to his continuing in employment. A Grant Letter issued on March 1, 2017 quantified his entitlement at 31,878 equity shares.

Waterfield later refused to allot the shares, contending that Kurpad was no longer entitled to them after ceasing to be an employee. In a communication dated October 15, 2020, the company said the allocation was subject to its internal policy and the discretion of its board. It also contended that the options stood relinquished when Kurpad ceased to be an employee.

Before the high court, Waterfield argued that the shares could not be allotted in the absence of an ESOP scheme complying with Section 62 of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. It also challenged the tribunal's interpretation of the appointment and Grant Letters. The company further argued that directing allotment of the shares by way of specific performance was impermissible.

The court rejected the challenge. It held that the tribunal was within its jurisdiction in interpreting the appointment and Grant Letters. The appointment letter did more than merely offer an option. It specified the quantity of shares and the period after which they would vest, subject to continued employment.

The Grant Letter subsequently quantified Kurpad's entitlement at 31,878 shares. It stated that the shares were granted in consideration of the services he had rendered in relation to his employment.

“If there was any doubt whether subject shares vested in the claimant, the aforesaid disposition in the grant letter removes the same. 31878 equity shares were quantified as the entitlement of the claimant in consideration of the services rendered by the claimant in relation to his employment with the Petitioner Company,” the court observed.

The court also rejected Waterfield's reliance on the absence of an ESOP scheme. It noted that the appointment and Grant Letters contained, by and large, the conditions concerning vesting and the period of vesting. The court also took note of evidence that similarly placed employees had received shares despite the absence of an ESOP.

The court also held that the tribunal's interpretation of the contract was not a ground to interfere with the award under Section 34. It found that the tribunal had construed the appointment letter together with the Grant Letter and had arrived at a sustainable finding.

“The Arbitral Tribunal was, thus, within its jurisdiction in construing the appointment letter in juxtaposition with the disposition under the grant letter. The construction of the terms of the contract, it is trite, is within the province of the jurisdiction of the Arbitral Tribunal. The error in the construction of contract, or, for that matter, the erroneous interpretation of the terms of the contract, is not a sustainable ground for the interference with the arbitral award.”, it noted.

On specific performance, the court held that directing Waterfield to allot the shares was justified. The shares had been offered as part of the growth prospect and incentive for Kurpad to render services for the company.

“The exercise of discretion to award a relief which compels the Petitioner company to perform its part of the contract to allot the shares on the faith of which the claimant had rendered services for requisite period, cannot be faulted at, even on equitable consideration,” the court observed.

The court also noted that the allotment represented 0.9% of the company's then paid-up share capital. It held that this would not create such difficulties in managing the company as to amount to hardship that was not envisaged when the contract was made.

The court dismissed Waterfield's petition with costs. It left undisturbed the arbitral award directing allotment of 31,878 shares and payment of costs of ₹15.51 lakh.

For Petitioner: Sumit Rai, with Nidhi Singh, Nidhi Faganiya and Owais Khan, i/b Vidhii Partners

For Respondent: Karl Shroff, with Chirag Bhavsar and Anand Jagmalani, i/b Vis Legis Law Practice