An appeal held in August in the Scottish Court of Session, against a decision made in the Employment Appeal Tribunal, confirmed that a transferring employee under Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) still had a right to participate in its former employer’s share incentive plan.
Although this decision was held in the Scottish Court of Session, the decision is still binding in England and must be considered going forward.
Mr Gallagher (“Mr G”) joined a share incentive plan with his former employer by entering into a separate partnership share agreement (“PSA”) as there was no reference to the plan in Mr G’s employment contract.
2 years later, Ponticelli Limited (“Ponticelli”) acquired Mr G’s former employer. Ponticelli wrote to Mr G to advise him he would receive compensation as Ponticelli was not going to provide a share incentive plan.
Mr G applied to the employment tribunal, arguing that he was still entitled to be a member of a share incentive plan equivalent to the plan he had entered into with his former employer.
The tribunal originally agreed with Mr G, so Ponticelli appealed and lost. However, Ponticelli argued throughout that the rights and obligations under the share incentive plan arose under the separate PSA and not under Mr G’s contract of employment, therefore the TUPE regulations did not apply.
Did Regulation 4 of TUPE apply to Mr G’s circumstances? Regulation 4 states that on the completion of a ‘relevant transfer’, all of the transferring employer’s ‘rights, powers, duties and liabilities under or in connection with’ the employee’s contract are transferred across.
Mr G argued that the PSA contained obligations in connection with his contract of employment, therefore Regulation 4 of TUPE applied.
Ponticelli’s central argument relied on the citation of another similar case to bolster their justification that Regulation 4 of TUPE did not apply. However, the Court held that the case was of no assistance to the issue of Mr G’s share plan as the facts were not sufficiently similar.
The PSA fell within the definition of being a right, with obligations, “in connection with” Mr G’s employment contract, therefore Regulation 4 of TUPE applied and Ponticelli’s appeal was refused. The PSA formed a key part of Mr G’s financial package in his role, as contributions to the share incentive plan were made via salary deduction each month with contributions up to 10% in return for the allocation of shares to Mr G.
Ponticelli were required to provide Mr G with a share incentive scheme of “substantial equivalence” to the scheme provided to him by his former employer.
If a company is looking to acquire another company and employees are being transferred under TUPE, it is important to review the employees’ contracts of employment and any other terms and conditions and look for any particular references to providing or participating in, share incentive schemes. seethe acquiring company can then ascertain if such references are likely to place a liability on the acquiring company to provide a scheme of “substantial equivalence”.
When undertaking due diligence, consider the questions that are raised with the target company as regard to any arrangements concerning financial benefits or incentives and copies of all agreements relating to such benefits or incentives. This is so that any red flags can be raised and addressed early on in the acquisition process and prevent further complications at the final stages of the acquisition.
The full transcript of Ponticelli Limited v Gallagher 2023 CSIH 32 is available here.
For more information, please contact the corporate team.
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