Analyzing Restricted Stock Unit Agreements
A Restricted Stock Unit Agreement is an agreement made between a company and a recipient or purchaser of that companies restricted stock, usually an employee. A Restricted Stock Unit is a grant valued in terms of company stock, but in such a situation, company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit. Depending on plan rules, the participant or donor may be allowed to choose whether to settle in stock or cash.
Common in corporate settings, Restricted Stock Unit Agreements generally address the following issues:
1. Parties. The name of the company and the employee must be identified.
2. Number of Shares and Price. The amount of restricted shares, the price of each share, and the total purchase price should be identified. When and how payment is to be made should also be discussed. Details regarding the purchase price may not be important if the shares are given to the employee for free.
3. Covenant Not to Sell. The most important provision of the agreement is the employee's promise not to sell, assign, transfer, or otherwise dispose of any or all of the restricted shares until the termination date(s) set forth.
4. Termination Dates. This provision should set forth the dates that the restrictions on selling the stock terminates. The date may be the same for all shares or may be broken off. For example, perhaps 1/3 of the shares lose their restrictions after one year, 1/3 the next year, and 1/3 the following year.
5. Termination of Agreement. The agreement should refer to specific provisions of the employment agreement in terms of addressing the issue of the termination of the employee's employment with the company. Generally, if the employee is terminated without cause, then he gets to keep the shares and they lose their restricted status. If the employee is terminated for cause, then the employee loses the shares altogether.
6. Clear Explanation of Restricted Status. The agreement should clearly notify the employee that the certificate for restricted shares shall bear a legend to the effect that the transferability of each share is restricted in accordance with the provisions of the agreement and that they have not been registered with the SEC and thus they may not be sold or transferred.
7. Employee Representations. The employee must represent and warrant to the company that the restricted shares are being acquired for him or her solely for his or her own account and not with a view to, or for sale in connection with, the distribution thereof.
8. Miscellaneous. A provision should be included that states that the agreement, together with the Employment Agreement, embodies the entire understanding between the company and the employee and supersedes all prior agreements and understandings relating to the matter covered.
These are the most essential provisions of a Restricted Stock Units Agreement. Generally entered into by an employer and an employee, this agreement is a critical part of enticing the employee to stay with the company and, by tying the employee's financial interests to those of the company, motivates the employee to perform at his/her best.
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