The existence of ESOP-type programs — depending on the company’s preferences — may be entirely public or strictly confidential.
The fact of implementing such a program can serve as a tool for building the company’s image — as a business that effectively motivates collaboration and shared growth by “sharing” ownership. Incorporating ESOP into the company’s marketing strategy therefore implies public access to information about the program’s existence and, typically, its basic criteria.
But what if the company has no intention of disclosing any information about its ESOP-based program and wishes to keep its existence strictly confidential?
This situation most often occurs in companies that neither need nor want publicity around their incentive programs, and where participants are selected very carefully. Confidentiality may also be driven by the fact that each participant may be offered individually tailored terms — such “inequality” could potentially cause tension within the team.
Moreover, the very offer to participate in an ESOP program may sometimes be a form of distinction — a proposal not extended to everyone. In such cases, discretion is also advisable.
There are several tools available to maintain confidentiality in these situations.
The primary tool is, of course, appropriate non-disclosure agreements (NDAs), signed at the outset of discussions. To effectively encourage compliance, these agreements should include appropriate sanctions for breaching confidentiality. It is worth emphasizing, however, that such sanctions should be disciplinary rather than deterrent — the goal of offering ESOP participation is not to discourage the potential participant from the outset.
As with any contractual obligation, NDAs do not provide a 100% guarantee of actual compliance.
Regarding the “external” consequences of breaching confidentiality, it is important to remember both the concept of trade secrets (which may include the implementation of an incentive program as economically valuable information) and the protected image of the company. The legally protected image of a legal entity includes many elements, among them the procedures and practices that shape how the company is perceived by clients, employees, contractors, and competitors.
Participants should be aware that disclosing information about the company’s incentive program — especially its terms — may be interpreted as a breach of trade secrets and/or damage to the company’s image.
One must also consider the “internal” consequences of such disclosures — in cases where ESOP programs are “tailor-made,” i.e., each participant is offered different terms for exercising their entitlements, there is no certainty about how other team members will react to learning that a particular individual has been included in the program.
For information on what solutions are worth implementing — in addition to NDAs — we invite you to contact us.
