Jurisdiction, the application of local law and the currency of benefits based on share option plans were key factors that resulted in a $6 million award by the National Labour Court of Appeals in favour of a former director general of a large telecommunications corporation (the plaintiff and the co-defendant respectively). The case illustrates that the risks associated with share option plans increase in cases of termination of employment.
Although the ruling was made in November 2014, it only became public in 2015 and had a big impact on domestic and international corporations' implementation of share option plans in Argentina, primarily due to the size of the award (approximately $10 million including legal and court fees).
The ruling rejected the defence argument of lack of jurisdiction and nullified the termination agreement between the executive and the corporation. The court held that the termination agreement violated public order because it was not a fair agreement between the parties. Therefore, the waiver of future claims was nullified. This was the starting point of the ruling's legal construction. The court disregarded the fact that the plaintiff had worked as a top-level and highly compensated executive and treated him as any other employee. Further, the court dismissed the plaintiff's demand for penalties based on wrongful registration of employment, concluding that as he was the person in charge of setting the company's compensation policy, he could not be compensated for the alleged flaws in the registration of his own employment. This represents major progress in terms of legal responsibility for the registration of employment under Argentine law, as courts are usually reluctant to acquit companies from paying penalties, arguing that the creditor is responsible for registering his or her own employment. Thankfully, this decision may become official policy.
The ruling also addressed the shared liability between the different defendants (international corporations from the same economic group or ownership successors), concluding that they were beneficiaries of the plaintiff's services and were thus liable for payment of the award. This type of risk should serve as a warning, highlighting the importance of due diligence processes in M&A operations.
The ruling also addressed the nature of benefits associated with share option plans, concluding that this was definitively part of the executive's salary, as it represented earnings and an economic benefit for him. The ruling includes numerous references to international treaties and Supreme Court of Justice case law regarding the protection of workers and human rights.
The ruling also dismissed the defendants' demand to apply foreign law (specifically, from the US state of Georgia) to the employment contract and the benefits granted to the plaintiff. The court concluded that such a demand violated local law and public order: the plaintiff had rendered his services physically in Argentina, so the application of local law was mandatory. While this decision is not particularly innovative, it is relevant to the design of compensation policies that will be applied overseas.
The ruling also rejected the plaintiff's petition to include the prorated share option plan in the calculation for his severance payment. This decision was based on a National Labour Court of Appeals full-session ruling in 2009, issued under a procedural regime that is no longer in place. Procedural law was amended in 2013 and the existing regime does not provide for full-session rulings, but rather rulings by the Court of Cassation. The amendment was passed through Congress in the face of social unrest and protest, as many viewed it as a mechanism implemented by former President Cristina Fernandez de Kirchner to appoint judges to rule in favour of the government in certain key disputes (eg, the quantification of public pensions). Judge Craig had previously ruled contrary to the conclusions of this full-session ruling. However, in the case at hand she complied with it, following an internal regulation issued by the Supreme Court of Justice that a new procedural regime will be suspended until the Court of Cassation has been integrated. Craig's decision was far from easy to predict. The economic impact that this conclusion had on the award is crucial. Had Craig concluded the opposite, the amount of the award could have been doubled.
The ruling also concluded that the benefits granted to the plaintiff based on the share option plan should be consolidated in US dollars, as stocks were nominated in that currency. Because of increased inflation in Argentina, this decision also had a crucial impact on the award granted to the plaintiff. The opposite decision could have reduced the value of the award up to 30% depending on the time of payment. This decision was also hard to predict. Few precedents have accepted the petition to consolidate labour credits in a foreign currency. Most rulings order the consolidation of credits in Argentine pesos. Under local law, the defendants may still pay in Argentine pesos, but the applicable exchange rate will be that of the date of payment, which is significantly higher than the exchange rate of the date of termination that would have applied if the credit had been consolidated in pesos.
The ruling is an example of the risks associated with the implementation of share option plans overseas and their potential impact on redundancy payments.
For further information on this topic please contact Javier E Patrón or Enrique M Stile at Marval O'Farrell & Mairal by telephone (+54 11 4310 0100) or email (email@example.com or firstname.lastname@example.org). The Marval O'Farrell & Mairal website can be accessed at www.marval.com.ar.
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