Right to ESOPs remaining unchanged even when parent company was subjected to insolvency proceedings

A prominent listed company has an unlisted subsidiary (“Client”) amongst its other subsidiaries. The listed company’s Promoter was known to almost everybody in India and belonged to a business family, being in the top 5 networth in India.

Promoter was a politically exposed person too. As the listed company was subjected to insolvency proceedings, there was risk to the Client. The Client was a profitable entity and was a going concern having its business in every corner of India.

The proposed acquirer of the parent listed company has sought to cancel Client’s existing ESOP Plan under which a substantial portion was already vested. It was a high risk case for the Client, as the parent company was listed, Promoter was a known person with a bit of political exposure, case was before Hon’ble NCLT, and last but not the least was it was standing for Insolvency (which generally supersedes other laws).

The years long labour of Client’s employees for earning vested ESOPs was palpable; but perceivably, the fate of such ESOPs were hanging on a sword.It required critical analysis of Client’s own facts, the Companies Act, law of Insolvency, Accounting Standards, and other relevant laws and legal precedents, to come to a formal opinion that ESOPs can not be cancelled under law.

Ultimately, this resulted in great relief to Client’s ESOP Grantee employees and later on understood and happily accepted by the proposed acquirer, creating a Win-Win.