It is not uncommon for my Portland business law clients to approach me or one of the other business attorneys in our law firm and ask about providing stock to one of the company employees as an incentive to join the company or a bonus to existing employees. The Oregon Court of Appeals released a common sense opinion recently that confirmed the advice we give our clients on the effect under Oregon law of promising stock to employees.
A quick editorial note here is in order: As a Portland employment law attorney who advises closely held businesses, I cannot stress enough the importance of thinking very carefully about whether it is appropriate or advisable to give up ownership of the company to an employee. If you decide that the talent is so important to the profitability or growth of your company that you are willing to give up equity to entice them to work for you, document the relationship. Contact a lawyer with experience drafting employment contracts.
The recent court of appeals opinion involved a case entitled Yeoman v. Public Safety Center, Inc. The action was brought by a husband who was the personal representative of his deceased wife's estate.
The estate alleged that the wife had been promised a share of ownership in a company called Public Safety Center, Inc. Indeed, since the she had retired years earlier, the corporation had always provided her dividends, just like it might a shareholder.
The defendant corporation countered that it had not actually issued stock or dividends to the deceased and that her stock "ownership" showed up nowhere in the corporation's records, filings or tax forms, and no stock certificates were ever issued to her.
Public Safety, Inc. was a closely held business, with a husband and wife team as its sole shareholders. To entice the decedent to become an employee of the company, they purportedly offered her a 10% ownership interest to vest over the course of five years at 2% per year.
The decedent was employed with the company for a year before she was fired for "unexcused absences" and "unproductivity." Thereafter, the company provided her dividends annually for three years before she died in a car accident.
The company argued that the dividends were in the nature of a profit share. The estate argued that she was entitled to ownership.
Plaintiff argued that shares of a corporation transfer when the consideration for them is given to the company. The company, in turn, argued that the shares must actually have been issued for plaintiff to become a shareholder.
The Court of Appeals engaged in a detailed review of the Oregon Business Corporation Act in concluding that the plaintiff had raised a fact question as to whether she had become a shareholder:
"From the foregoing provisions of the Oregon Business Corporation Act, we glean the following: (1) a subscription agreement is a contract between the subscriber and the corporation, ORS 60.144(5); (2) consideration for that contract may consist of "services performed" or "contracts for services to be performed," ORS 60.147(2); (3) before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate, ORS 60.147(3); (4) once the corporation receives the consideration for which the board of directors authorized the issuance of shares, the "shares issued therefor are fully paid and nonassessable," ORS 60.147(4); and (5) share certificates are evidence of, but not prerequisites to, shareholder rights, ORS 60.161(1); Babbitt v. Pacco Investors, 246 Or 261, 271, 425 P2d 489 (1967) ("Neither is it necessary, in order for one to become a shareholder, that a certificate of stock, which is only evidence of ownership of an interest in the assets of the corporation, shall have been issued.").
"Read together, those statutory requirements provide that, in the context of a subscription agreement based on services, ownership of shares passes once the corporation has received full consideration for authorized shares pursuant to the terms of the subscription agreement. In other words, the shares are deemed to have "issued" and to "be fully paid and nonassessable" once the corporation accepts payment in exchange for consideration for the authorized shares. Cf. Babbitt, 246 Or at 270 (citing case law for the proposition that "payment is essential where the subscription is for shares of an existing corporation"); see also Mark S. Rhodes, Transfer of Stock § 2.8, 45 (7th ed 2006) ("[A] stock certificate is not necessary to the ownership of stock, and, as a legal matter, stock may be considered issued prior to the issuance of a certificate. * * * Acceptance of payment for the stock may be considered issuance, regardless of the execution and delivery of a certificate.") (footnote omitted); id. at 46 ("It has been said that * * * 'it is the payment, or the obligation to pay, for shares of stock, accepted by the corporation, that creates both the shares and their ownership.'" (quoting Illinois-Indiana Fair Ass'n v. Phillips, 328 Ill 368, 376, 159 NE 815 (1927))).
"Viewing the evidence in the light most favorable to plaintiff, and drawing all reasonable inferences in his favor, a trier of fact could reasonably conclude that defendant issued shares to Anita. There is evidence that the corporation offered Anita shares of the company in the amount of "2% per year," such that it would take "five years for her to earn the full 10%"; that Anita then went to work for defendant and performed services for defendant pursuant to her agreement to receive shares; that Anita received checks after her employment ended "on the basis of 2% of some aspect of [defendant's] financial performance" and that defendant's president called Anita "about the 2%" to make sure that she had received her check."
A trial would be had and a jury would determine whether the decedent would be considered a shareholder. That means more legal fees and more risk for the company.
As with every area of preventative legal maintenance, at Slinde Nelson we tell all of our business law clients the same thing: protect yourself. We all enter into contractual relationships, employment or otherwise, with the belief or hope that it will all work out and no dispute will ever arise. But there is good reason to protect your business from that eventuality. Indeed clarifying the rights and responsibilities of the employer and employee is a key first step to avoiding disputes in the first place.