Restrictions on transfer of award: Overview, definition, and example
What are restrictions on the transfer of an award?
Restrictions on the transfer of an award refer to conditions or limitations placed on the ability of the recipient to transfer, sell, assign, or otherwise dispose of an award or benefit they have received. These awards may include various forms of compensation, such as stock options, bonuses, prizes, or other benefits granted by an employer, company, or other entity. The restrictions are typically outlined in the terms and conditions of the award agreement, and they serve to control how and when the award can be transferred to another party.
In many cases, these restrictions are put in place to prevent the award from being sold or given away to others, to ensure that it is used by the recipient as intended, or to maintain the value of the award within the organization or company. For example, in employee stock options, restrictions may limit the ability to transfer the options to other individuals until certain conditions are met, such as the passage of time or the completion of a vesting period.
Why are restrictions on the transfer of award important?
Restrictions on the transfer of awards are important because they help the awarding party maintain control over the distribution and use of the award. They ensure that the award remains with the intended recipient and is used in alignment with the purpose of the award. In the case of stock options, bonuses, or other performance-based awards, these restrictions encourage employees to remain with the company or meet specific performance targets before the award can be fully realized or transferred.
For the organization, these restrictions can also prevent the award from being transferred to individuals who may not have the same alignment with the organization's goals or values. They protect the value of the award and ensure that it is only available to those who are eligible to receive it under the terms of the agreement.
Understanding restrictions on the transfer of an award through an example
Imagine an employee, John, who has been granted stock options by his employer, TechCo. The options give him the right to buy 1,000 shares of TechCo stock at a set price of $10 per share, but the stock options come with a restriction: John cannot transfer or sell the options to anyone else until after a 3-year vesting period.
The reason for this restriction is that the company wants to ensure that John remains employed and meets certain performance benchmarks before he can sell or transfer the stock options. Additionally, if John tries to transfer the options to another person during the vesting period, the company can cancel the transfer and keep the options for itself.
After three years, the restrictions on the transfer of the stock options are lifted, and John is free to sell or transfer the options to another party, if he wishes.
Example of restrictions on transfer of award clause
Here’s how a clause related to the restrictions on transfer of an award might appear in an employee contract or award agreement:
"The Recipient acknowledges that the Award granted under this Agreement is non-transferable, and may not be assigned, sold, pledged, or otherwise transferred to any other person or entity except as permitted by the Company’s policies. This restriction shall remain in effect until the Award has fully vested or the Recipient has met the specific conditions outlined in Section 3 of this Agreement. Any attempt to transfer the Award in violation of this restriction shall result in the immediate forfeiture of the Award."
Conclusion
Restrictions on the transfer of an award are essential in managing how awards, especially performance-based awards like stock options or bonuses, are handled and distributed. These restrictions ensure that awards are used as intended, typically to retain employees or incentivize certain behaviors or outcomes. By outlining clear guidelines on when and how an award can be transferred or sold, these restrictions protect both the recipient and the awarding party from unintended consequences or misuse. Understanding and adhering to these restrictions is crucial for recipients to fully realize the benefits of the award, while also maintaining compliance with the terms of the agreement.
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.