Blogs

Stock Options and Non-Competition Agreements

07.22.11

Stock options for executives and other key employees are a significant component of compensation packages.  They give the employee an equity stake in the company and provide an incentive for future performance.  The options signal the importance of the employee to the company, and the company has an interest in protecting the company’s goodwill, which is enhanced by the employee’s contribution and at risk if the employee leaves the company.

Public company employers in Texas previously may have been reticent about linking non-competition agreements to the award of stock options or, if they included the restrictive covenants, uncertain about their enforceability in Texas.  Texas employers have been forced to rely on providing confidential information as part of the employment relationship in order to provide adequate consideration for non-competition covenants.  The Texas Supreme Court, in a June 2011 opinion, has now significantly changed this landscape.

As discussed in an Employment Alert from Gardere’s Labor and Employment Team, the court’s 6-3 decision in Marsh USA Inc. and Marsh & McClennan Companies, Inc. v. Rex Cook effectively announced a new standard for enforcing non-competition agreements in Texas by opening the door for other consideration to support enforceable non-competition agreements.  Specifically, this case concerned a non-competition agreement as part of an award of stock options to a key executive.  The court focused on the employee’s level within the company, the ownership position represented by the stock options, and the company’s interest in protecting the company’s goodwill.

OUR TAKE:  Public company employers in Texas should consider non-competition agreements as a component of stock option awards, whether as a restrictive covenant in addition to what may be included in a written employment agreement or as the only restrictive covenant for key employees without employment agreements.  Texas employers already imposing non-competition agreements as part of stock option grants now have a greater level of comfort in the enforceability of those covenants.  Regardless, non-competition agreements must still be reasonable in terms of duration, geographic scope, and the extent of restricted activity generally.

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