Decision highlights importance of precise employment contract language
A Hong Kong court recently dealt with an employment contract dispute where a worker claimed he was entitled to the outstanding US$750,000 of a promised US$1,000,000 sign-on bonus.
The worker argued that despite transferring his shares in the company to a third party, he remained eligible to claim the full bonus under his employment agreement's terms.
The employer had already paid US$250,000 but refused to pay the balance, arguing that the worker's share transfer disqualified him from claiming the remainder. The employer even counterclaimed for the return of the US$250,000 already paid, asserting it was made by mistake.
The case centered on interpreting two specific clauses in the employment agreement's Schedule 2, which outlined alternative methods for receiving the sign-on bonus. The Court of Appeal had to determine whether the worker could invoke either clause to claim the full bonus amount.
The worker began employment with the employer, a licensed financial institution in stock brokerage, under a three-year fixed term contract. He later signed a new employment agreement for 39 months that would continue indefinitely until terminated.
This new agreement included a sign-on bonus outlined in Schedule 2, which gave the worker two choices: either take US$750,000 in cash immediately or receive company shares representing 5% of the company, with provisions to sell these shares back for up to US$1,000,000 under various conditions.
The worker chose the share option in April 2014. The court noted: "Pursuant to clauses 2(a) to (c) of Schedule 2, [the manager], [the director], [the worker] and [the employer] entered into a shareholders agreement in July 2014, and [the director] transferred 5% of the shares in [the employer] to [the worker] on 17 October 2014."
In December 2014, the worker and company directors entered into a share purchase agreement (SPA) with CBD Investment (Cayman) Corporation (CBD) for the sale of 85% of the company's shares. As part of this transaction, the shareholders agreement was terminated through a Deed of Termination.
By January 2016, the worker had transferred his shares to CBD, which became the majority shareholder and took control of the company. However, CBD failed to pay the agreed consideration, which led to an "Unwind Deed" in February 2017.
On 10 February 2017, the worker served a notice requesting payment of US$1,000,000 under Schedule 2. The notice stated: "I refer to my contract of employment with [the employer] dated 3 April 2014. I am writing to notify you under clause 2(d) and 2(e)(iii) of Schedule 2 of my decision to elect to receive a cash payment calculated in accordance with sub-clause 1."
The court had to determine whether the worker could invoke either clause 2(d) or 2(e)(iii) of Schedule 2 when he served his notice.
The employer argued that for the worker to make an election under clause 2(d), he needed to still be a shareholder. For clause 2(e), they claimed the worker needed to have transferred his beneficial ownership through specific "tag-along or drag-along rights" mechanisms in the shareholders agreement.
The court disagreed with a lower court's finding that the worker still had beneficial interest in the shares despite transferring them to CBD.
The judges stated: "The undisputed evidence is that [the worker] had transferred the Shares to CBD on 28 January 2016, as [the director] had done, and CBD became the majority shareholder in [the employer] and [the employer] was run and controlled by CBD. The beneficial interest in the Shares had passed to CBD."
The court then examined whether the worker could claim under clause 2(e)(iii), which allowed for payment after a "Third-Party Buyout" of shares.
The employer insisted this clause only applied to sales through "tag-along or drag-along rights" in the shareholders agreement, not voluntary sales. They argued the wording made "eminent commercial sense" because in forced sales through these mechanisms, shareholders couldn't negotiate terms to protect their interests.
The court rejected this interpretation, stating: "The words 'whether by way of tag-along or drag-along rights' cannot be read as 'only if by way of tag-along or drag-along rights'... if it were meant to exclude voluntary agreed sales in a third-party buyout from this provision, clearer wording would be required."
The judges added: "We do not see the 'eminent commercial sense' put forward by [the employer's lawyer] as altering the effect of the plain meaning. Nor do we think giving effect to the plain meaning is to ignore the words 'whether by way of tag-along or drag-along rights'."
The court found additional support for their interpretation in sub-clause 2 of clause 2(e)(iii) which stated: "For the avoidance of doubt, and in the event of any dispute, it is the parties' express intention that the formula in the preceding paragraph preserves a right by you to receive a total sign-on bonus of US$1,000,000 within the term."
The judges determined that completion of the third-party transaction had occurred when the worker served his notice in February 2017, making him eligible to claim under clause 2(e)(iii).
They noted: "By then, the SPA was amended twice to provide for payment of a nominal consideration of US$1 on completion and the 'Initial Cash Consideration' was to be paid after completion. The shares sold under the SPA had all been transferred to CBD and it had taken control of [the employer] as the majority shareholder."
The court concluded there was "no arguable defence or triable issue to the Bonus Claim based on the exercise of the rights under clause 2(e)(iii)" and ordered the employer to pay the outstanding US$750,000 plus interest to the worker.
