We are frequently asked by clients about the rules that apply to the treatment of equity awards in the context of a reduction in force. Our answer is that only a few rules apply, and even those rules might not apply in all situations.
When a company engages in a reduction in force, or RIF, the company usually seeks to provide some additional benefits to employees to soften the departure and as consideration for the employees’ release of claims. This is good risk management. These extra severance benefits are often set out in a severance plan. Most broad-based severance plans do not address the treatment of equity awards in a reduction in force, believing that the equity plan itself would dictate how the award is treated upon termination. However, most equity awards do not contain specific rules about how a reduction in force as a corporate event would affect equity awards (although typically they address corporate events such as a merger or a change in control).
