Companies Cannot Profit from Administrative Failure in ESOP Issuance 

Introduction 

A Bombay High Court ruling has made it clear that companies can’t use their own mistakes to dodge paying what they promised. The court said a firm can’t skip out on equity-based compensation pledges just because they never drew up a formal Employee Stock Option Plan (ESOP). That kind of oversight doesn’t give them a legal excuse to break a contract.  

This came up in the case of Waterfield Advisors Private Limited vs. Sridhar Kurpad. Justice N.J. Jamdar pointed out that letting a company do this would basically “amount to putting a premium on its own wrong.” In other words, a business shouldn’t benefit from its own failure to do things by the book. 

Facts of the Case  

The conflict started when Mr. Sridhar Kurpad, who used to be the Director of Operations at Waterfield Advisors, asked for the 31,878 equity shares that were promised to him when he joined in 2011. His appointment letter laid out an equity grant of 0.5% for year one and 0.2% for each of the next two years, with the shares set to vest during years four through six. A Grant Letter from 2017 officially put a number on this entitlement, treating it as payment for his past work. After Kurpad left the company, Waterfield refused to hand over the shares.  

They came up with the arguments that: –  

• Regulatory Non-compliance: The company said it couldn’t legally issue the shares because it never put together a formal ESOP scheme under the Companies Act, 2013.  

• Relinquishment of Rights: They claimed Kurpad gave up his right to the shares once he stopped being an employee, and that giving out shares was up to the board’s judgment.  

• Hardship: They pushed back against the tribunal’s order for “specific performance,” which would have forced the allotment to happen. The court pointed out that the appointment and Grant Letters spelled out exactly how many shares were involved and when they would vest.  

Further, other employees in similar positions got their shares even though no formal scheme existed, so refusing Kurpad made no sense in comparison. The court also said the Arbitral Tribunal had every right to interpret the employment contract, and giving up 0.9% of the share capital wasn’t a real hardship for the company. 

Takeaway 

The main takeaway from this ruling is that equity compensation is a contractual obligation which cannot be rescinded by the company simply because they did not follow their internal process for regulatory approvals. The court ruling protects employees from such “arbitrary” decision-making by the company. As a result of this ruling, Waterfield Advisors is obligated to allocate the 31,878 shares and pay costs amounting to ₹15.51 lakh.