Henshaw v Sqribe

THIRD RESPONDENT BRIO TECHNOLOGY INCORPORATED FILE NUMBER: IRC4988 of 1999 CORAM: Peterson J CATCHWORDS : Unfair contract - s106 - form of order necessary to give effect to judgment re share options - parties agreed to court choosing between four alternatives - options vesting monthly over six month period - court declines to accept value on the dates shares vest - high-low average market price over the period adopted. LEGISLATION CITED : Industrial Relations Act 1996 CASES CITED : Mitchell-Calvert v Yahoo Inc. [2001] NSWIRComm 136 HEARING DATES: 08/17/2001 DATE OF JUDGMENT: 08/31/2001

APPLICANT Mr I M Neil of counsel

SOLICITOR Abbott Tout SYDNEY. LEGAL REPRESENTATIVES: RESPONDENTS Mr J J E Fernon of counsel

SOLICITOR Baker & McKenzie SYDNEY.

JUDGMENT: - 1 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES

KIM HENSHAW v SQRIBE TECHNOLOGIES PTY LIMITED AND ORS

Application under s106 of the Industrial Relations Act 1996.

1 On 22 December 2000 I gave judgment in respect of an application by Kim Henshaw against the respondents concerning a contract of employment which was found to be relevantly unfair and harsh in respect of the period of notice due to the employee upon termination and in respect of share options foregone as a result of the loss of employment. In effect, the applicant was awarded an additional six months notice, to be paid at his final average monthly income under the 1999 Incentive Plan and, in respect of share options which would otherwise have vested in the employee had his employment continued over that period of six months, a vesting of options on a monthly basis over that notional six month period. The parties were directed to confer and report upon appropriate declarations and orders to give effect to the judgment.

2 Agreement was reached between the parties upon all aspects of the order save the quantification of an appropriate money order representing the value of the share options awarded.

3 To that end, the parties agreed that it was proper to pay the applicant an amount to compensate him for the loss of the options that would notionally vest in him. The parties identified three methods by which an amount could be calculated. It was between these three methods that the parties asked that the court exercise its discretion in making a selection.

4 Method 1 calculates the average monthly stock price, based on the average closing price for each relevant month. The result produced is $US44,318.

5 Method 2 uses a rolling average closing stock price. The average closing stock price for the whole relevant period produces a result of $US60,274. The "high-low" average closing stock price for the whole of the relevant period produces $US67,092.

6 Method 3 utilises the average closing stock price for the whole of the relevant period and gives a result of $US44,601.

7 The approach of the applicant is to prefer Method 2 in either of its variants as representing the method best calculated to replicate the way in which the applicant is likely to have behaved if he had been treated fairly, by receiving the benefit of vested options in each of the relevant months following the date of his termination, but accepting that it is impossible to do so perfectly. It was submitted that the evidence shows that the applicant did not habitually exercise the options that did in fact vest in him on the precise dates when they vested and he did not clear his shareholdings by the end of each month. There is no reason to assume that he would have exercised and sold each instalment all in the same month that they notionally vested in the light of the judgment. The applicant submitted that the respondents' approach suffers the defect that it assumes, through Methods 1 and 3, that the applicant would have exercised in each month the options that vested in him during that month and that he would have sold the stock that he thereby acquired in the same month.

8 The respondents, in preferring Methods 1 and 3, urged that a principled but cautious approach is necessary in the quantification of the matter. It was submitted that the approach selected ought not reflect the vagaries and uncertainties attendant upon the market or the investment or trading decisions of the applicant, particularly where they are assessed in hindsight. An analogy was drawn between the grant of options and the payment of a money sum by way of, for example, salary which is paid from time to time. Here, the employee received each month a grant of options and a principled method is to identify the value of that grant at the time it was given by the employer. Here, the applicant exercised his options within the requisite 30 day period after termination of employment and sold them within a short period of time.

Conclusions 9 The primary judgment in this matter found that the applicant had been induced to take up employment with the respondent by the grant of options. Those options were an opportunity for him to benefit from any rise in the value of the stock on the market. The termination of his employment deprived him of the opportunity to both exercise the options at a time convenient to him and to make such selling decisions as he was inclined to make, undoubtedly having regard to market conditions. Here, the valuation is entirely notional and, I consider, cannot be determined by an assessment of the value at the date of either their vesting or their exercise. To so approach it would give certainty in one dimension only: it fails to take into account the employee's habit or practice, what he would be likely to have done had the opportunity, notionally extended by judgment and order, been enjoyed as a fact contemporaneously with employment. Further, I do not consider it appropriate to assess the value of the options so that it would reflect a uniformity as between different employees receiving options on the same day. The value to the employee is a different thing to the cost to the employer; it is the former with which this assessment is concerned.

10 The value is not like salary or wages because it is contingent on a number of factors, one of which is the vagaries of the market and another the whim or wisdom of the employee's selling decisions. As I understand share options, while the employer gets the benefit of the price paid by the employee as the exercise or strike price, there is (if the options are to be of any benefit) a differential between the strike price and the market value of the shares when the options are exercised or when the shares are traded. That differential does not constitute a cost to the employer in the same sense that salary is a cost but represents a theoretical dilution of the overall value of shareholders' funds. Whether that dilution is actual will depend on a number of matters but particularly the market.

11 I raised with counsel the approach taken by Kavanagh J in Mitchell-Calvert v Yahoo Inc. [2001] NSWIRComm 136 and whether that might provide some guidance to the proper result here. In that case her Honour awarded an additional period of notice of two months and a vesting of options in respect of each of those months. The value of the options was assessed at the date of vesting. In this case the respondent points to both the choice of vest date and the unpredictability of the value of an award if any other date is chosen as supporting its position here. However, that timing of the assessment was referable not to the significance of the vesting but to the applicant's practice, established in the evidence, of trading in the shares immediately after he exercised his options. That practice enabled the applicant to avoid the consequence of a substantial fall in the share price subsequent to his termination and before the award. However, it would seem that approach, while not an issue requiring decision in that case, is consistent with the proposition the employee's trading practice should be of greater weight.

12 Once it is accepted that the valuation should reflect the value to the employee rather than the cost to the employer, it is necessary to pay regard to the anticipated future selling activity of the applicant based on the probabilities. The evidence establishes that his practice was not to sell shares acquired as a result of options on the date on which they vested or necessarily the date on which he exercised the options after vesting. I consider the fairest method of those advanced and that which would best achieve a level of compensation more aligned with the likely reality based on the evidence is that involved in Method 2 which utilises the high-low average stock price for the relevant periods. This produces the higher sum of the two advanced by the applicant. My view in favour of this approach is not based on the comparative value of the sums but rather the logic underpinning the sum. It seems to me the closing price does not reflect necessarily the most likely price at which a sale might have been effected to the greatest advantage. The high-low average on the day suggests itself to me as a more appropriate indicator of the likely result. Accordingly, I would adopt, for the purposes of the order, the sum of $US67,092 less the agreed total exercise price of $US2,190 leaving $US64,902. I order accordingly.

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