As many know, consideration must be given by an employer to an employee to create a valid and enforceable non-compete contract. Often, the consideration is a bonus or increase in pay but sometimes the consideration is the transfer of stock in the company and this situation can lead to interesting problems
For example, what happens when an employer gives stock to an employee in exchange for a non-compete agreement but the non-compete is later held to be unenforceable? This very scenario occurred in Texas (Ray & Sons, Inc. v. Stroman, 923 S. W. 2d 80). An employer prepared a stock certificate in the employee’s name (transferring 10% of the company’s stock) but retained possession of the stock certificate. Approximately one year later, the employee left the employer and took a job with a competing company. The employer claimed the employee had violated the non-compete and was not entitled to receive the stock.
The employee sued the employer for the stock. At trial, the court ruled the non-compete was unenforceable due to the fact that it was unlimited in duration and extended to customers with whom the employee had no association. Surprisingly, the trial court also ruled that the employee was still entitled to receive the stock. The employer appealed the case and the appellate court also determined the non-compete provision to be unenforceable but reversed the trial court on the issue of the stock certificate.
The appellate court held that the promise of stock and the promise not to compete were “mutually dependent promises.” Meaning that but for the employee’s promise not to compete the employer would have never promised to give him stock.
Wonder what would have happened if the employee had possession of the stock certificate before the relations soured?