Summary of recent employment law cases - Pinsent Masons

Update
October 2009
Share Plans
A summary of recent employment law cases
The following cases have considered points of employment law, but raise issues which are
of interest in relation to share incentive arrangements.
Exercise of option shortly before termination
of employment
The decision
Mr Plumbly was the first employee of the company which
became Beatthatquote.com. He was granted an option to
subscribe at minimal cost for shares in the company. As the
relationship between him and the company's founder and
controlling shareholder had deteriorated, he gave notice to
exercise his option at the earliest opportunity - on the first
anniversary of the date of grant. Shortly afterwards, he
resigned from the company.
The company did not allot the option shares to Mr Plumbly
on the basis that due to his misconduct, he was not entitled
to exercise the option. In this approach, they seem to have
relied on the decision in Tesco v Pook [2004] where it was
held that an option could not be exercised by an employee
who was in breach of his fiduciary duties to the company,
and who was guilty of a repudiatory breach of his own
employment contract.
The High Court found in favour of Mr Plumbly – as a
question of fact, he did not owe the company any fiduciary
duty, and was not guilty of misconduct as alleged. The
company should therefore have honoured his option
exercise. Instead of requiring the company to issue the
option shares however, the Court award damages in favour
of Mr Plumbly.
Point to note
Behaviour during employee's notice period
The decision
Mr Cook resigned from his position with MHSK Ltd on a 6
month notice period. During that period a dispute arose
between the company and Mr Cook, following which Mr
Cook went off sick with stress. He was later allowed back to
work. Subsequent disciplinary proceedings resulted in his
being summarily dismissed.
In an appeal relating to the lawfulness of his dismissal, the
High Court found that MHSK Ltd had effectively affirmed Mr
Cook's employment contract in the way they had treated
him with sympathy and concern in relation to his sickness.
The Court of Appeal upheld this position. MHSK Ltd could
only allege breach in circumstances where it had reserved its
position in relation to bringing disciplinary proceedings.
Point to note
This case does not relate directly to share incentives, but the
impact of the decision may be relevant. Where an
employee's entitlement to awards is determined at the date
of actual termination (rather than at the date where notice
of termination is given), conduct during the notice period
may be relevant. An employee who resigns may have a
greater entitlement under the rules of a share plan than one
who is dismissed.
Cook v MSHK Limited and Ministry of Sound Recordings Ltd
[2009] EWCA Civ 624
It is interesting to note that the Court awarded damages
rather than requiring the company to issue the option
shares. This is potentially more costly for a company.
However, any potential issues arising from a minority
shareholding by a disgruntled employee are avoided.
Plumbly v Beatthatquote.Com Ltd. [2009] EWHC 321 (QB).
Continued on reverse

Effect of entire agreement clause
in compromise agreement
The decision
This case considered the interaction between restrictive
covenants contained in a share purchase agreement, and
employee's service agreement and his compromise
agreement. The Court of Agreement held that the restrictive
covenants in the compromise agreement did not replace
those in the share purchase agreement, despite the inclusion
of an "entire agreement" clause in the compromise
agreement.
Points to note
The case was again not directly concerned with share
incentives. However, it serves as a reminder that a
compromise agreement should consider all elements of the
relationship between employer and employee. Entitlements
under share plans must therefore be reviewed in reaching
compromise arrangements.
In addition, if restrictive covenants form part of share
incentive arrangements, these will sit alongside any other
such covenants in, for example, employment contracts, and
therefore consistency between the various arrangements will
be important.
Personnel Hygiene Services Ltd v Mitchell [2009]
EWCA Civ 1047
Who to Contact
Judith Greaves
Tel: 0113 294 5232
Email: judith.greaves@pinsentmasons.com
Rory Cray
Tel: 0113 294 5179
Email: rory.cray@pinsentmasons.com
Lynette Jacobs
Tel: 0161 250 0198
Email: lynette.jacobs@pinsentmasons.com
© Pinsent Masons LLP 2009
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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