4 September 2020
In May 2019, Uber’s long awaited IPO took place. Last week, 190 current and former Uber employees filed a lawsuit against the ride-hailing firm in relation to their RSUs that were settled on the IPO date.
The plaintiffs are arguing that Uber unfairly accelerated the settlement of these RSUs by six months, resulting in a significantly higher tax burden for the employees. The full complaint can be read here.
Whether or not Uber had the contractual right to accelerate the employees’ RSUs is yet to be seen. The company have said the claims are “without merit”. Regardless of the outcome, the case provides a reminder of key thinking points for companies when making decisions about in-flight awards on a corporate event, the terms of their award documents more generally, and expectations regarding anticipated share price movements.
The background facts forming the basis of the lawsuit are:
- Prior to its IPO, Uber granted restricted stock units (RSUs) to many of its employees and contractors. These awards were due to vest following the IPO, with the shares delivered six months after the IPO, subject to a further six month holding period.
- Three days pre-IPO, Uber issued a memo stating it would be in the best interests of the company, and the award holders, to accelerate the settlement of the RSUs to the IPO date.
- Uber issued the shares at the time of the IPO at a price of $45 per share. Award holders were taxed on this value (and it is claimed that only the minimum income tax that might be due was withheld). Six months later, when participants were actually able to sell their shares, the Uber share price had dropped to $27 a share.
- The lawsuit is seeking compensation for the additional income tax incurred by the participants due to the acceleration of the RSUs, which is estimated in excess of $9 million.
Why did Uber accelerate the settlement of the RSUs?
The memo sent to RSU holders set out the following reasons for accelerating settlement:
- Accelerating the settlement locked in the amount of tax Uber would have to pay on behalf of employees. This mitigated any risk of the company having to pay a higher amount in taxes, should the share price increase post IPO.
- Uber was required to withhold taxes when the RSUs vested and were settled (depending on the jurisdiction). Uber opted to “net settle” the RSUs, by delivering a lower number of shares and paying the relevant taxes out of the IPO proceeds. Uber said this was to reduce the number of shares flowing into the market, following the six month holding period on the shares.
- Separately, Uber suggested that accelerating settlement may be beneficial to employees if the stock price increased - any increase in value would typically be subject to lower capital gains tax rates (on sale).
Whilst Uber’s memo set out their reasons for the acceleration, and suggested the acceleration would be in the best interests of the award holders and Uber - the plaintiffs allege that Uber was acting purely in its own interests. They also claim that Uber would have known a drop in share price was more likely than a rise, so the acceleration created a risk that award holders could ultimately have paid more in income tax than they could realise from the sale of the underlying shares (once they could be sold).
Did Uber have a right to accelerate settlement?
This is to be determined:
- The RSU agreements stated that, subject to certain exceptions, modifications or amendments that would materially and adversely affect participants were not permitted, unless the amendment was agreed to in writing.
- The plaintiffs claim, and the memo itself state, that the acceleration was not something RSU holders were asked to agree to – the decision was made unilaterally and no consent was obtained.
This will be a very interesting case to watch, irrespective of the outcome. Whenever we see high profile cases relating to share plans, there are a number of learning points for all companies to consider when operating their own plans.
For many companies, IPOs and other corporate events can trigger the accelerated vesting and settlement of their incentive awards, or the desire to do this. Understanding how your awards work during these events is vital – any mistakes could result in legal action. Companies should map out how their awards would be impacted by a corporate transaction, and ensure their documents are consistent and provide sufficient flexibility. Although it is not always possible to know when a transaction is about to happen, it is a good idea to carry out this analysis well in advance of any transaction taking place, or as part of your usual document health check process.
More broadly, this case should act as a reminder for all companies to regularly review and update plan rules and award agreements, to ensure they suit your needs and are contractually enforceable. If you are making changes that impact outstanding awards, you need to work carefully within the amendment provisions and specified processes that you have and if in any doubt, act with caution and seek legal advice. Expectations of share price movements are also hard to judge, especially during the current climate.
We will monitor this case and keep you updated with any useful developments.
If you have questions or concerns regarding your own award documents, in the context of a corporate event or more generally, please do let us know. No company wants to be the subject of a lawsuit, especially from their own employees!
Sally & Tom