Beware of Giving Shares to Employees

Beware of Giving Shares to Employees

Ohio is an "at-will" employment state, meaning an employer is permitted to terminate an employee at any time and for any reason without incurring liability, so long as the reason is not illegal or in violation of an existing employment contract. However, Ohio's "at-will" employment doctrine is limited with respect to employees who also own shares in their employer.

Ohio courts have concluded that an employee who is also a minority shareholder cannot be terminated as an "at-will" employee. Rather, the employer must provide a legitimate business reason for such termination. The reasoning is that termination under the "at-will" employment doctrine provides majority shareholders a way to gain absolute control of the company while circumventing their fiduciary duty to act in good faith with respect to minority shareholder interests.

When giving shares to an employee consider the following:

Whether the employee will obtain a majority or minority ownership interest;

Creating minority shareholders causes fiduciary concerns for controlling shareholders;

Once an employee becomes a minority shareholder in a closely held corporation, they are no longer considered an "at-will" employee;

A minority shareholder-employee can only be terminated upon a legitimate business reason, even such employee is considered an "at-will" employee;

Instead, issue "phantom-stock" to employees, which provides the employee with additional compensation directly correlated to the performance of the corporation without giving an actual ownership interest.