In November 2024, the Tel Aviv Labor Court ruled that, under the circumstances, the dismissal of an employee was conducted in bad faith, as the purpose of the termination was to prevent the employee’s entitlement to the grant and exercise of stock options (Labour Case (Tel Aviv) 7535-07-22 Tímea Kovács v. Novo Central Ltd.).

Case details

The plaintiff, Tima Kovac, served as a Lead Data Scientist at Novo Central Ltd., a startup company engaged in providing fundraising solutions. Under the employment agreement signed between the employee and the company, it was agreed that in addition to her monthly salary, she would be entitled to company stock options, with the agreement including a vesting mechanism for employee options.

It was further stipulated in the agreement that the allocation of the options was subject to approval by the company’s board of directors.

Shortly before the vesting date of the first tranche of options, the company notified the employee of her termination, citing that her role was no longer necessary due to product definition changes and the company’s constrained financial situation.

The employee argued that the dismissal was conducted in bad faith, with the true intention of preventing her from exercising the options. Conversely, the company claimed that the grant of options had never been duly approved by the board of directors, and therefore the commitment to grant options had never matured into a binding right.

Court Decision

The Labor Court accepted the employee’s position and ruled that, based on the totality of the evidence, the timing of the dismissal was not incidental and was intended to prevent the employee from exercising options that were about to mature, and that this conduct by the company constitutes a breach of the heightened duty of good faith applicable in employment relationships.

In its judgment, the court held that the company did not take steps to bring the allocation of the stock options for approval by the board of directors, despite being obligated to do so. In addition, the court found that during the hearing the employee was not presented with the true reasons that led to her dismissal, and that the termination was therefore carried out in bad faith.

The court emphasized that dismissal intended to prevent an employee from exercising stock options that are on the verge of vesting constitutes an abuse of the employer’s power and a breach of the heightened duty of good faith that applies in employment relationships.

Accordingly, the court ruled that the employee was entitled not only to exercise the tranche of options that was about to vest, but also that the company would bear the tax liability arising from the option exercise, in addition to further monetary compensation.

Practical Implications for Employers

This ruling clarifies and emphasizes employers’ duty to act in good faith and with responsibility when undertaking obligations to grant stock options to employees, particularly in startup companies where stock options are a central and common form of compensation.

The judgment sets clear boundaries for practical conduct: general wording or conditional commitments alone are not sufficient, and the employer must take proactive and substantial steps to fulfill these obligations. Lack of care or attempts to circumvent vesting conditions in order to frustrate employee rights may be regarded as bad faith, undermine employee trust, and expose the company to significant legal risks.

For the full text of the court's decision (in Hebrew), Click here.

Note: This overview provides concise information for informational purposes only. It does not constitute legal advice and should not be relied upon as such.