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Using stock options

Stock option programmes as a benefit? A popular practice in the Czech Republic used by a number of companies for many years.

In its recent decision, the Supreme Court expressed its opinion of the elements of the stock option contract (not only for employees and statutory body members). So how to conclude a valid option and what to avoid?

It has become a hit of the modern times that a joint-stock company and a member of its board of directors conclude an option for securities of a participating nature as a component of the remuneration for discharge of duties. However, so-called option plans or stock option programmes are often offered to employees as one of the benefits. Option contracts are also typical of joint ventures.

The Civil Code (Act No. 89/2012 Coll.) does not cover the option contract as a contract type, but it is an institute well known in legal theory and recognized by court practice.

The essence of the option is the right of a member of the board of directors, employee or any other person benefitting from the option to acquire the company’s shares under certain circumstances. The “call option” describes a situation where, subject to the fulfilment of specific conditions and upon the beneficiary’s call, either securities of a participating nature are directly transferred or the beneficiary becomes entitled to claim the conclusion of a transfer contract (i.e. “sell to me” situation). The “put option” describes the situation where the beneficiary already owns the shares and may claim their purchase (i.e. “buy from me” situation).

In the case of employee options or options for members of the board of directors, the aim is to motivate these persons to contribute to the growth of the company and increase in the market value of the shares by their activities, whether as part of employment or discharge of duties. When implementing these stock programmes, the company that offers them must meet other special statutory conditions in order to be able to acquire its own shares and then transfer them to its employees or members of the board of directors. In the Czech context, there is also a common situation where the parent company’s securities of a participating nature are the subject of the option.

The option programme must always be approved by the company. It may be part of the articles of association, internal regulation or contract for discharge of duties concluded with a member of the board of directors, or it may be approved on a one-off basis for a specific case.

The option contract may either take the form of an a agreement on a future contract, where the beneficiary becomes entitled to claim the conclusion of a transfer contract, subject to certain conditions and upon a call. However, the option contract may also be a contract for the transfer of securities, the effect of which being linked to the fulfilment of a certain suspensive condition.

Typical conditions for option stock programmes include the expiration of time (the option may only be exercised by a member of the board of directors, serving for more than two years) and fulfilment of the agreed economic indicators (e.g. company’s profit).

According to the Supreme Court, the option contract must indicate the conditions under which the right to exercise the option (exercise the call) arises for the beneficiary, the unambiguous specification of the securities and their number, and the price for which the beneficiary will acquire them (the price may be specified either directly in the contract, or at least the method of its determination must be agreed). It cannot be ruled out that the option is agreed free of charge.

Although he Supreme Court’s new decision is based on the so-called old regulation of the ineffective Commercial Code (Act No. 513/1991 Coll.), the Supreme Court’s conclusions can be clearly applied even with the current regulation. Option programmes thus continue to be an often effective way of motivating and engaging members of the statutory body or staff.

Source: 
Act No. 89/2012 Coll. 
Act No. 90/2012 Coll. 
Supreme Court, 29 Cdo 1738/2015