Most mining and resources professionals accumulate equity gradually and without much ceremony. A grant arrives with a letter. Another follows the year after. Over a decade or more, what began as a modest incentive quietly becomes one of the largest assets you own, sitting alongside your superannuation and the family home.
For most of that period, the only questions anyone asks about it are financial ones. When does it vest? What will the tax be? Should the shares be sold or held? Those are the right questions, and our colleagues at Resources Unearthed have written about them at length.
Then the ownership of your employer changes. It may be a takeover. It may be a demerger. In this industry it is most often neither of those. It is the sale of the operation you work at, to a buyer you have never worked for, while you stay exactly where you are.
At that point the question is no longer what your equity is worth. It is whether you will receive it at all. And that question is answered by a document you were handed years ago and may not have reviewed since.
A Scenario Worth Sitting With
Consider a technical lead who is approached by a competitor during the transition and resigns two months before completion. Depending on how his plan is drafted, he could be treated as a bad leaver and as a result forfeit awards that would have vested within weeks. His departure may also engage a restraint, which is a separate question again, and one worth reading alongside what has been written here previously about restraint clauses and career plans.
That outcome is not unusual. It is also largely avoidable with advance knowledge and by taking proper advice on the terms of the documentation.
Whole Company, or Just Your Mine
The distinction matters, because the two events do quite different things.
Where the whole company is acquired, the change of control provisions in your plan are probably going to be triggered directly. Unvested awards are likely going to be dealt with under those provisions, and your employment usually continues with the new owner.
Where a single asset or business unit is sold out of a larger portfolio, the position is often far less tidy. The listed parent whose shares you hold may be entirely unaffected by the transaction. Your employment, however, may transfer to a buyer with no connection to that parent and no obligation whatsoever under its share plan. You can find that continuing in the same job, at the same mine, on the same roster, is treated for the purposes of your equity as having left your employer or may trigger time limits for you to do something with shares or options you may have rights to under your plan.
Whether that is a good leaver event, a bad leaver event, or something the board must turn its mind to is not a question you can answer by looking at the mine. It is answered in the plan rules.
Your Plan Rules Are a Contract
An employee share scheme is not a definitive promise for all time. It is a set of contractual terms, usually called the plan rules, sitting alongside your employment agreement and the individual grant letters you have received over the years. Together those documents determine what you own, what you might come to own, and the circumstances in which you may lose it or may have to take positive steps to protect or deal with those rights.
Most executives could not say where those documents are, and that is entirely understandable. They arrive during the excitement of a promotion, they are long, and potentially nothing turns on them for years at a time. The difficulty is that the moment they begin to matter is often well after the key terms have already been established.
What a Change of Control Provision Actually Does
Almost every plan contains one. What it does varies considerably from plan to plan.
Some provide for automatic vesting of unvested awards on a change of control. Some provide for pro-rata vesting based on the portion of the performance period served. Some provide that unvested awards simply lapse unless the board determines otherwise, and some are silent, leaving the position to general provisions that were never drafted with a specific transaction in mind. The consequences of those four positions are entirely different, and two executives holding what look like similar packages can land in very different places for no reason other than the drafting of those clauses.
Board Discretion Is the Part That Surprises People
The provision that causes the most difficulty in practice is not the vesting formula. It is the discretion.
Many plans give the board, or a remuneration committee some element of discretion over the treatment of unvested awards, and often some ability to determine whether a departing participant is treated as a good leaver or a bad leaver or whether certain rights or restrictions on the awards are triggered such as a limited time to exercise options. That discretion may be drafted very broadly. It may also be exercised by a board that is itself changing as part of the very transaction in question and sometimes that discretion can be completely unfettered.
Executives frequently assume that such a discretion will be exercised reasonably, and in many cases it is. But unless the clauses specifically required the board to act reasonably, an expectation is not an entitlement, and the distinction only becomes apparent at the point where it matters most. In many cases the clauses will provide that the Board can exercise its discretion in any manner it determines (including something that may be seen as unreasonable or unfair).
How This Interacts with Leaving
The leaver provisions have been covered before from the financial planning perspective, in ESS: Advice beyond employment and in ESS & Redundancy: Good Leaver Considerations for Mining & Resources. The broad position will be familiar. Redundancy commonly attracts good leaver treatment with pro-rata vesting, while resignation or termination for cause can commonly result in forfeiture.
What is far less well understood is how those same provisions behave during a transaction, when the categories themselves become blurred. The scenario set out above is the ordinary shape of that problem, not the exotic version of it.
Three Things Worth Doing
- Find the documents. The plan rules, your grant letters and your employment contract. They are usually held by company secretarial, or available through the plan administrator, and you are entitled to them.
- Read the change of control clause and work out whether your position is an entitlement or a discretion. Those are two very different things, and only one of them is yours.
- Check how your employment contract defines termination, redundancy and restraint, and whether those definitions line up with the plan rules. They are separate documents, prepared at different times and often by different people, and they do not always agree.
The Conversation Worth Having
If your equity represents a substantial part of your wealth, it deserves the same attention you would give any other asset of that size. As I have written previously about leadership liability and asset protection as professional responsibilities grow, the useful conversation is the one that happens before the event rather than after it.
Most executives read their plan rules for the first time when something has already been announced. By then the terms are fixed, and the options are limited to whatever the document happens to say.
As a lawyer, my role is to help you understand what you are actually holding, and what would happen to it, well before anyone makes an announcement.
Need help understanding your executive share scheme documents? Our legal advisers at Resources Unearthed are here to guide you. To arrange a time to meet with Craig Hong please call 61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au
To learn more about Craig, visit this link.
Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting and business advisory services for executives, professionals and business owners in the mining and resources sectors.
Disclaimer: This information is general in nature and does not take into account an individual’s personal situation. Each person’s situation is unique and each person needs to consider whether the information is appropriate to their needs, and where appropriate, seek professional advice from us, an accountant and a financial adviser.
