Restricted stock bonuses may be illegal

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And now for the good news: someone's taking a bank to court for paying the bulk of his bonus in stock.

Charles Ferguson, of Ferguson Solicitors, an employment law firm whose raison d'etre is defending hard-done-by traders from the banking powers that be, says he's working on a case that's due to hit the courts in March.

Ferguson declines to reveal the name of the individual or bank concerned, but says the case hinges on the argument that paying a bonus in stock that can't be accessed for several years and is swiftly rescinded if the recipient dares to leave for a competitor, amounts to restraint of trade.

"We have a very, very good chance of winning," says Ferguson. "The purpose of restricted stock is to act as handcuffs so that if you resign or go to work for a competitor of some sort, you lose it."

Cash-strapped banks like UBS plan to pay an unusually high proportion of their bonuses in stock this year, so Ferguson's case may throw a large spanner in their works.

Lawyers say the case against restricted stock is likely to be strongest when a) a large proportion of the bonus is paid in it, and b) when conditions are attached which mean recipients forgo the stock if they leave for rival employers (quite normal in banking).

"Restricted stock rights with conditions that recipients forgo the rights if they work for a rival employer may well be unenforceable, particularly if the restrictions have effect for lengthy periods," says Steve Lorber, partner at law firm Lewis Silkin.

Early vesting

Banks may already be aware of the legal implications of high stock payouts. The Financial Times' Alphaville bloggers report today that banks like UBS and Merrill Lynch, which are paying a high proportion of this year's bonuses in stock, will allow recipients to access it sooner than usual.

Ferguson points out that no one's brought this kind of case before because big banks typically buy out restricted stock if they want to hire someone. But he says its existence makes it harder for bankers to up sticks and move to smaller firms.

If the case succeeds, banks could be faced with hefty claims for retrospective compensation. "I suspect there will be an awful lot of people who resigned over the past few years and were told they'd lost their stock because they'd gone to a competitor, who'll say, 'Excuse me, but would you be so kind as to give me my stock back'," Ferguson muses.

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