Required consideration for an ESOP

When issuing an ESOP, ensure that the proper consideration (money, property, or past services) is received and recorded. Even if the ESOP is issued on the basis of a loan provision, consideration must be received from the registered owner of the ESOP.

In Pearson Financial Group Ltd. v Takla Star Resources Ltd., 2001 ABQB 588 (CanLII), an application was made by Pearson Financial Group Ltd. The plaintiff (Pearson) was to cancel shares or to lose the voting power associated with the shares held by a Director of Takla. Pearson is a wholly owned subsidiary of a company that began acquiring Takla shares.

Once Pearson was fully incorporated, all Takla shares were transferred to Pearson. Soon after, Pearson challenged the validity of an ESOP on the basis that one of Takla’s directors did not pay any money for the shares and took advantage of the loan provision in the ESOP. The loan provision allowed up to five years of a loan for the payment of the ESOP. The directors granted an extension of the loan for a further five years. Pearson argued that this extension could not be granted.

The court held that because the company articles gave the directors power to amend or revise the ESOP, there was nothing prohibiting them from extending the loan term. Furthermore, the court said that the law is clear that a share shall not be issued until consideration for the share is fully paid in money, property, or past services.

However, the court argued that the cancellation of the shares were too harsh of a penalty, in this case. The Talka director should have received a cheque for the loan and then that money should have been used to write a cheque to the company for the shares. Because this technicality was missed, the court directed that the exchanging of cheques happen forthwith.

Written by Rajah. Rajah Lehal is Founder and CEO of Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.