Disability of optionee: Overview, definition, and example
What is disability of optionee?
The "disability of optionee" refers to a situation in which the person holding an option (referred to as the "optionee") becomes disabled and, as a result, may be unable to exercise their option as per the terms of the option agreement. An option, in this context, is a financial instrument that gives the optionee the right (but not the obligation) to buy or sell an asset, such as company stock, at a predetermined price within a specified period.
In the case of employee stock options, which are commonly granted as part of compensation packages, a disability of the optionee could potentially affect their ability to exercise these options. Many option agreements have provisions in place that address what happens if the optionee becomes disabled, often providing special conditions or extensions for exercising the options if the individual can no longer work due to illness or injury.
Why is the disability of optionee important?
The disability of an optionee is important because it can impact the optionee's ability to benefit from the rights granted under the option agreement. If the optionee becomes unable to exercise their options within the time frame specified in the agreement due to a disability, the option may expire or become worthless unless provisions for such circumstances are included in the agreement.
For both employers and employees (or option holders), understanding how disability affects the exercise of options is critical. For the employer, offering clear terms regarding disability ensures that employees with disabilities are treated fairly and are still able to take advantage of their options. For the option holder, knowing the terms related to disability helps them plan for contingencies in case of health issues.
Understanding disability of optionee through an example
Imagine an employee, Jane, who has been granted stock options as part of her compensation package. These options allow her to purchase company stock at a discounted price, but they are set to expire in five years. Unfortunately, Jane becomes disabled due to an accident and is unable to return to work before the expiration date of the options.
Without any provisions for disability in her option agreement, Jane might lose the ability to exercise her options, and the options would expire. However, if her option agreement includes a disability clause, it might extend the time in which she can exercise the options or provide alternative ways for her to exercise them, even if she is unable to return to work.
Example of a disability of optionee clause
Here’s an example of how a "disability of optionee" clause might appear in an option agreement:
“In the event that the Optionee becomes disabled, as defined by [relevant legal or company policy], the Optionee shall have [X] months from the date of such disability to exercise any vested stock options. If the Optionee does not exercise the options within this period, the options shall expire. In the event of the Optionee’s death during the disability period, the options may be exercised by the Optionee’s designated beneficiary.”
Conclusion
The disability of optionee clause is an important provision in option agreements that helps protect the rights of the option holder in case of unexpected illness or injury. It ensures that employees or other individuals holding options are not unfairly disadvantaged by a disability and provides a fair opportunity to exercise their options. Whether for stock options or other types of financial options, it is essential for both option holders and issuers to understand how disability affects the terms of the agreement and what provisions are in place to handle such situations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.