Employee stock options serve as a valuable tool for companies aiming to attract and retain talent. The practice of offering stock options to employees, particularly in start-up settings, has become increasingly prevalent. According to the 2022 Morgan Stanley Annual Stock Plan Participant Survey, 45% of participants cited stock plan benefits as a factor in joining their company, and 60% considered these benefits influential in their decision to stay.
The presence of employee stock options in a target company significantly impacts M&A transactions. In such scenarios, the buyer must pose pertinent questions to comprehend the mechanics of the target company's stock options.
The sale of controlling shares typically triggers the ability of option holders to exercise their options—either by purchasing or selling shares. Therefore, a meticulous review of any existing employee stock option plan is imperative during the due diligence phase before finalising the share purchase agreement.
Conversely, sellers bear the responsibility of providing representations and warranties concerning the employee stock options.
While certain jurisdictions address the provision of stock options to employees in their legal frameworks, Turkish law does not explicitly regulate employee stock options. Below, we briefly outline various mechanisms employed by Turkish companies to extend stock options to their employees.
Mechanisms for Employee Stock Option in Turkey
- Principle of equal Treatment
The principle of equal treatment, entrenched in Turkish Labour Law, ensures that employees in comparable situations are not subject to unjustified discrimination. Companies can establish stock option plans specifying eligibility criteria, such as management level, without violating this principle.
- Conditional Capital Increase:
As per Article 463 of the Turkish Commercial Code, a general assembly may decide on a conditional capital increase, granting employees the right to acquire new shares. Details, including nominal value, number, and type of shares, must be specified in the company's articles of association.
- Share Buyback:
Turkish Commercial Code permits companies to repurchase their own shares, capped at 10% of share capital. The general assembly authorises the board of directors, with specified limits on the number, value, and price of shares. Financial conditions must also be met to safeguard the company's net assets.
- Transfer of Existing Shares from Shareholders
Founders may allocate a portion of their shares to key employees as option shares, avoiding the complexities of creating a share pool. Consideration must be given to the willingness of shareholders to participate in this mechanism.
- Phantom stock option
Phantom stock options grant employees a financial interest in company shares without actual ownership. Not regulated by Turkish law, these contractual agreements operate under the principle of freedom of contract, allowing the definition of waiting periods and performance targets.
Impact on M&A Transactions
The presence of employee stock options significantly influences M&A transactions. Buyers must inquire about the workings of the target company's stock options to make informed decisions. The sale of controlling shares triggers the exercise of options, necessitating careful review and clarification during due diligence. Sellers, in turn, are obligated to provide representations and warranties concerning the employee stock options.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
