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Restricted Stock: Advanced

When I am still working at my company, can it rescind, cancel, or reduce the size of my grant before vesting instead of firing me?

Not unilaterally. As illustrated by an example discussed in The Blog, instead of firing someone before vesting, a company can restructure the employee's stock grant in a way that returns some unvested stock or options to the company for reuse in grants to others.

Although no law specifically addresses this question, courts have examined this situation and provided some guidance. For your company to cancel your grant before vesting, you must formally accept the reduction of benefits in exchange for a legally sufficient consideration. Courts have found that if a company continues to employ you after issuing warnings about poor job performance, the extension of employment (i.e. not firing you) can count as a consideration in exchange for cancellation of the grant. For an example, see the opinion of the US Court of Appeals First Circuit in Cochran v. Quest Software, Inc.

Your company would explain explicitly in the grant modification form:

  • the reason for rescinding the grant
  • the consideration

Ideally, the cancellation would be documented both in a written notice sent to you and in a form that you would sign to acknowledge this action. Companies may also rescind or cancel outstanding stock options as part of an overall approach to the problems of underwater options or backdated options.

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