Most equity plans include a governing law provision that provides that the plan and the awards granted under the plan are governed by the law of the jurisdiction in which the issuer is incorporated. In addition, we typically recommend that companies include a venue provision in their award agreements providing that any dispute related to the plan or awards has to be litigated in a forum chosen by the issuer. For US-based issuers, this will usually be a federal or state court in the United States, where courts are more likely to enforce the provisions of the award agreements (which typically favor the issuer). The hope is that, by including such governing law and venue provisions, companies can defeat lawsuits brought by award recipients outside the United States on the basis that foreign courts (which are more likely to apply employee-friendly local employment laws) do not have jurisdiction. It is questionable if this argument always works (in fact, a UK court recently ruled that UK courts had jurisdiction despite a Massachusetts governing law and venue provision in the award agreement), but such venue provisions may at least have a deterrent effect in some cases.

A related question which comes up from time to time is whether arbitration clauses are a better way for companies to deal with employee disputes. In the U.S., this often will be the case, both to cut down on the costs related to lawsuits and the time it takes to resolve such disputes.

However, outside the U.S., it is doubtful that a typical "U.S.-style" arbitration clause will be enforceable. In the employer-employee context, arbitration clauses are rarely enforced outside the U.S. because most courts will view them as unconscionable given the balance of power in an employment relationship. That said, the equity award agreement is not entered into between the employer and employer but between the foreign parent company and a local employee. This and the fact that the equity awards are not necessarily a central part of the employment relationship could allow us to argue that the relationship is more of a commercial nature, in which case a court may be more inclined to respect an arbitration clause. However, this will differ from country to country and it remains unlikely that arbitration clauses will be enforceable in all countries in which a company grants equity awards.

Since most companies will not be prepared to analyze the enforceability of an arbitration clause on a country-by-country basis, companies should consider proceeding with including the arbitration clause and reviewing whether or not it may be enforceable only in case a dispute with an employee arises. Of course, companies would be losing the venue provision by including the arbitration clause (which necessarily has to replace the venue provision), but the enforceability of the venue provision is just as uncertain as the enforceability of the arbitration clause, so it is unlikely that companies are giving up any significant advantage by dropping the venue provision.

If U.S. companies wish to include an arbitration clause, the following suggestions may improve the chances of enforceability:

  • Use the International Centre for Dispute Resolution (ICDR), the international arm of the American Arbitration Association (AAA), as the arbitrator for non-U.S. employees, rather than the AAA. Non-U.S. courts likely will view the AAA as a U.S.-centric institution that will be biased towards the U.S. party which could affect enforceability. Using the ICDR may mitigate these concerns.
  • Use a well-drafted arbitration clause that is less likely to be viewed as unconscionable by foreign courts.
  • Separate the arbitration clause from the governing law provision in the award agreement. This way, if the arbitration clause is deemed unenforceable, it should not affect the governing law provision, provided a severability clause is included in the agreement.

As with a venue provision, it is very uncertain if a non-U.S. court would in fact decline to hear an employee's claim because of an arbitration clause. However, there also is no real downside to including such clauses, and companies may prefer to have consistency in the way they treat their U.S. and non-U.S. employees.