Over the past decade, the Supreme Court of Spain has been clarifying several legal issues affecting stock options granted in favour of the employees of a company.
The first key issue has been whether benefits obtained as a result of exercising stock options should be considered as salary. The Supreme Court has determined that stock options are a work incentive aimed at encouraging employee commitment and improving economic performance, and consequently are considered as salary. This has important legal consequences. For example, benefits obtained by employees as a result of exercising their options affect the calculation of severance pay, which is based on a number of days of salary (20 or 33, depending on the type of termination) per year of service at the company.
The other key issue analyzed by the Supreme Court is whether, during the option vesting period, the holding of the option is evidence of material economic content which is quantifiable and enforceable as a right. The Supreme Court has held that, as well as providing certain rights for workers in the event of death, retirement or disability during the vesting period, an option also generates a material economic right for the worker in the event of unfair dismissal. So the Supreme Court has held that a dismissal recognised as unfair (a very common outcome in Spain on the termination of employment contracts) and carried out only a few months before the end of the option vesting period should be regarded as unilateral conduct of the company to try to prevent workers from exercising their option rights, and workers have therefore been allowed to exercise their options once the vesting period has ended even though they were no longer employed by the company.
In a judgment handed down in May 2012, the Supreme Court qualified this approach when absolving a company from any obligation to pay the share benefits claimed by a worker who was unfairly dismissed. The Supreme Court took into account the fact that the dismissal took place only a few months after the grant of the stock options and that the prevention of exercise of the options was not in the contemplation of the employer when the dismissal took place. The Supreme Court decision is important because a new consideration in establishing compensation in unfair dismissal cases is now whether or not it was the company's intention that the worker should be deprived of the stock option rights by reason of the dismissal. Consequently not all unfair dismissals will automatically allow workers to retain their option rights and exercise them at the end of the option vesting period, even though they are no longer employed. It is only in those cases where it is apparent that the company has acted in bad faith that the company will be exposed to potential claims.
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