LeXcom Law firm

Section L. 1331-2 of the French labour code provides against employees that “fines or other financial sanctions are prohibited. Any provision to the contrary is null and void”. The French Supreme Court regularly confirms that any salary reduction, as well as the suspension or suppression of any compensation item decided by the employer in retaliation to a behavior considered faulty by the employer is an illicit financial sanction, e.g. the employer decides to cut a premium when this decision is not linked to the purpose of the premium. It is particularly true when a productivity premium is cut because of the faulty behavior of the employee, but not in consideration of his efficiency (French Supreme Court, November 22, 1995, n°4523 P, Civ. Bull. V n°309). Section L. 1331-2 of the French labour code does notdraw a list of the items the unilateral termination of which is considered as a prohibited financial sanction. The prohibition principle would thus apply to any compensation item (notably to benefits in kind such as company cars, French Supreme Court December 12, 2000, n°4985, Portanguen c/ Sté Cecorev). However, the French supreme court had so far not confirmed it applied to stock-options. In the case at hand, an employee whose employment contract had been terminated for gross misconduct, asked for the payment of her stock-options, forfeited according to the plan provisions due to the nature of the termination of her employment contract. The plan indeed provided that options were immediately forfeited in case of termination of the beneficiary’s employment for gross misconduct. Unlike the Court of appeals, which considered such clause, like any classical presence clause, prevented the former employee from exercising her options, the Supreme Court indicates that the deprivation of the rights to exercise the options in case of termination for gross misconduct is a prohibited financial sanction which cannot be set forth in a stock-options plan. The incriminated provision of the plan is therefore null and void, but the actual consequences of such decision are yet to be determined: Given the Supreme Court past case law regarding the validity if the presence condition and regarding the consequences of unfair dismissal with respect to option rights, such consequences could be the following:

• Either the stock option plan of the company provides for a presence condition for the employee to be entitled to exercise his options: in such case, the employee whose employment contract is terminated, for whatever reasons, could only be entitled to damages in compensation for the loss of his/her options;
• Or the stock option plan of the company does not provide for a presence condition, in which case it might be considered that the options should not have been forfeited and that, provided they did not expire for another reason, they should remain valid in the hands of the beneficiary, even though he/she is no longer employed by the Company.

This case law is likely to apply to foreign plans providing for the forfeiture of the options in case of termination for cause. It is therefore advisable, when possible, to avoid making any difference in a stock-option plan between different cases of termination of employment of the beneficiaries. This case law will most probably also apply to conditional awards plans such as Performance Shares or Restricted stock Units plans.