Stock Options
The creation of clear and precise language is very important with respect to termination obligations under the terms of a stock option agreement. The words used will determine whether the stock option plan is subject to the implied term of notice or, alternatively, is a stand-alone contract.
The General Rule
The implied term of fair notice, absent words to the contrary, will rule the day and will allow a damage claim for the incremental value of the stock options over the period of reasonable notice. Options which are unvested as of termination date, but would vest during the notice period will then form part of the compensable damage claim, as will the incremental valuation of the vested options.
The cases that follow are, in essence, determined by the precise wording of the documents under scrutiny. What follows thematically from this analysis is that the drafter may allow for the share options to terminate with impunity on the date of termination without incremental fair notice adjustment where the words of the document are clear and precise to define no entitlement in whatever circumstance employment ends.
The Supreme Court of Canada considered a parallel issue in its 2020 decision. 1 in which the plaintiff claimed the benefits of the company's LTIP. The facts showed that an event took place soon after the plaintiff's constructive termination which, in the normal scheme, would have allowed the plaintiff a financial benefit, had he remained employed.
The Court examined the issues and stated that the question is not whether the terms were ambiguous but rather did the plan "unambiguously limits or removes the employee's common law rights.
As an interpretative principle, given that the LTIP is a "unilateral contract", one what did not result from mutual negotiation, its terms which exlude or limit liability will be read "with particular force".
Words stating that the employee must be "full-time" or "active" will not suffice to extinguish his common law rights.
Further, a clause which purports to remove an employee's common law right to damages upon termination "with or without cause", will not suffice. An exclusionary clause must "clearly cover the exact circumstances which have arise. The implied term of fair notice, accordingly, was not contracted out, entitling Matthews to his claim. 2
This issue is reviewed in more detail here.
What About the ESA ?
One would expect that an argument that indirect employment benefits such as share options would be caught by the statutory minimum notice obligations. To date this has not been the case. Ontario’s statute requires the status quo of all terms and conditions of employment to be continued for the minimum statutory period, which, of course, hits its peak at 8 weeks. The stock options are obviously a term of employment as they are routinely extended for the common law notice period when justified on the facts.
Given the modest incremental sum that such a period would likely provide, a prudent drafter would allow for the ESA notice period to be reflected in the share option provision. The Act states as follows:
Requirements during notice period
- (1)During a notice period under section 57 or 58, the employer,
(a) shall not reduce the employee’s wage rate or alter any other term or condition of employment;
Might the stock option plan be a component of the "wage rate" and/or a “term or condition of employment” ? This is remedial legislation, to be interpreted liberally. Surely, this must be the case. Options are not given gratuitously. The options by their very terms are restricted to key employees. The cautious view would produce minimal pain. Why risk it?
The only case to deal with this argument, in which the submission was rejected, was Buchanan v Geotel. There was no rationale offered to support the conclusion which was very brief:
They 3 contend that the Employment Standards Act of Ontario does not give Mr. Buchanan any right to claim damages relating to the stock option agreement. I agree.
The Buchanan decision was using the earlier version of the ESA, which, however, contained the same wording on this issue. Buchanan was successful in his claim for other reasons and accordingly the ESA argument was of no moment to the case.
This decision should be considered to be instructive of the point.
The cases below were all decided before the 2020 decision of the Supreme Court in Matthews.
The cases which follow consider whether the common law claim has been ousted by the wording of the stock option document. The general synthesis which comes from these cases is that a careful drafting of the option document will accomplish this objective.
The Ontario Court of Appeal considered the interpretation of stock options on termination in the 1999 decision of Veer v Dover. In this case, the words of the stock option agreement read as follows:
If the option holder's employment with the corporation and/or a subsidiary, as the case may be, is terminated for any reason other than set forth in paragraphs 6, 7 or 8 above, whether such termination be voluntary or involuntary, without his having fully exercised his option, the option shall be cancelled and he shall have no further rights to exercise his option or any part thereof and all of his rights hereunder shall terminate as of the effective date of such termination.
The employer argued that this clause ended all Veer’s rights on the date of termination, a point which was not accepted by the Court of Appeal. The Court concluded that the reference to termination must be read to mean a legal termination and hence the claim for the option accruals for the notice period should succeed:
In either case, the termination contemplated must, I think, mean termination according to law. Absent express language providing for it, I cannot conclude that the parties intended that an unlawful termination would trigger the end of the employee's option rights. The agreement should not be presumed to have provided for unlawful triggering events.
Rather, the parties must be taken to have intended that the triggering actions would comply with the law in the absence of clear language to the contrary. There is no such language in these stock option agreements. Hence, following his unlawful dismissal on April 27, 1993, Mr. Veer had the twenty-four months of reasonable notice required for his termination to exercise the rights under the stock option agreements.
This decision does contemplate that specific language may have saved the day, had it defined more precisely termination rights under the stock option agreement.
The court referred to a similarly worded agreement in Ryan v Laidlaw in which the Court of Appeal in Ontario came to the same conclusion, namely that the termination reference must be read as meaning a legal termination:
Each of the 10 options are conditional upon the executive completing continuous service with the Company (which includes any of the subsidiaries), … to the last day of the year immediately following the granting date of the particular option, failing which the option becomes null and void.
The Court of Appeal also referenced Brock v Matthews in which case the wording of the stock option rights were limiting and upheld:
Upon the occurrence of any event specified in clause 10 hereof [which commenced 'In the event of the Employee ceasing to be an employee or servant of the Corporation'] (except the death of the Employee) prior to October 31, 1985, the option hereby granted shall forthwith cease and terminate and shall be of no further force or effect whatsoever as to such of the Optioned Shares in respect of which such option has not previously been exercised; provided that where the Employee is dismissed by the Corporation, the Employee shall have 15 days from the date notice of dismissal is given in which to exercise the option hereby granted in respect of the Optioned Shares available as of October 31 of the Year preceding such dismissal.
The decision by the Court of Appeal in Brock v Matthews reversed the trial judge who had awarded Brock his common law claim on the options. It stated as follows:
… [The trial judge] held that Brock could have exercised his option up to November 8, 1985, the expiration of the period of reasonable notice, and he made his calculations of the numbers on that basis.
With respect, we are of the view that he was in error. Brock was discharged from his employment on November 8, 1984. He had, in law, a right to reasonable notice or compensation in lieu of such notice. But the proper focus of the question relating to the interpretation of the share option agreements is not the determination of the period of reasonable notice or the quantification of compensation in lieu thereof. The proper focus of that question is the meaning, within the contemplation of the option agreements, of the words “notice of dismissal”, “dismissal” and “ceasing to be an employee”. In our view, that meaning is the same for all of the events described …
The Court of Appeal again considered this issue in Gryba v Moneta Porcupine Mines, a decision released in December 2000. The plaintiff was employed by the defendant for 9 years as its president. He was a member of the Board of Directors which drafted the Stock Option Incentive Plan. On termination he earned a salary of $84,000 and held 260,000 options. The stock option agreement read as follows:
5.2 If an optionee ceases to be employed by the Corporation for cause or if an optionee is removed from office as a director or becomes disqualified from being a director by law, any option or the unexercised portion thereof granted to such optionee shall terminate forthwith. If an optionee ceases to be employed by the Corporation otherwise than by reason of death or termination for cause, or if an optionee ceases to be a director other than by reason of death, removal or disqualification, any option of unexercised portion thereof held by such optionee at the effective date thereof may be exercised in whole or in part for a period of thirty (30) days thereafter.
The plaintiff testified that he did not exercise his options in the 30 day period, as he saw no benefit to do so. The trial judge, Swinton J., found in favour of the plaintiff and awarded him the value of his options as determined by the common law notice period:
While the plan does provide that a person in Mr. Gryba’s position would have 30 days after his termination to exercise his options, this interpretation does not determine his claim for damages. An employee dismissed without notice is entitled to damages for the amounts he would have received from employment had he been given proper notice and allowed to work through his notice period. Had Mr. Gryba been given proper notice, he would have had several months in which to exercise his stock options, not just the 30 days following June 20, 1995.
The Court of Appeal in a 2-1 decision upheld the trial judge, based on the interpretation of the operative clause. The Court reviewed the earlier decisions referenced above of Brock v Matthews and Veer v Dover. It distinguished Brock by its contractual wording which stated the effective date as when the employee ceased to be an employee plus 15 days, which language dealt with option rights, regardless of whether the termination was lawful or not.
We agree that the wording of the plan, in essence the terms of the contract, must govern: Brock v. Matthews Group Ltd. reflex, (1991), 34 C.C.E.L. 50 (Ont. C.A.). In that case, the 1978 stock option agreement specified that upon the employee ceasing to be an employee, the employee would have 15 days from the date of notice of dismissal in which to exercise his options. The 1981 option agreement stated that upon the employee ceasing to be an employee, the employee would have 15 days from the date of the occurrence of such event in which to exercise any options … that could have been purchased (but were not purchased) as at December 31 of the year in which such event occurred. In that case the history of the stock option clause and the reference to the end of the calendar year indicated that the date for the exercise of stock options was unchanged irrespective of whether termination was proper or not.
[50] The question here is whether the stock option plan clearly includes as a triggering event a termination that is done in breach of contract. See Veer v. Dover Corp. (Canada) Ltd. 1999 CanLII 3008 (ON CA), (1999), 120 O.A.C. 394.
[51] The wording in the stock option plan in this case is different from that in Brock and can be read as contemplating a lawful termination. While the plan speaks of the optionee “ceasing to be employed” as in Brock, supra, here the date for the exercise of stock options is 30 days following the effective date of termination. The effective date of termination would include the notice period. The wording of the stock option plan in this case can be read as contemplating a lawful notice of termination and the effective date of the cessation of employment is the end of the notice period. Our interpretation is supported by the fact that the stock option clause also provides that in the event of death or dismissal for cause the employee has no right to exercise stock options.
[52] Given this interpretation, the respondent was not required by the stock option plan to exercise his options within 30 days of his unlawful termination and was entitled to do so during his notice period.
The drafting hence determined the claim.
This was once again the result in the Court of Appeal decision in Kieran v Ingram Micro, a decision released in July of 2004. The court again examined the words of the relevant incentive plans and concluded that the plaintiff had no claim for the benefits of same over the common law notice period. The agreements, in this instance, read as follows:
[46] The Restricted Plan provided:
If Participant’s employment with Micro or any Affiliate is terminated for any reason other than death, disability … or retirement… prior to the time when all Shares have become Unrestricted Shares …, Restricted Shares… shall be repurchased by Micro at the lower of (x) the Purchase Price and (y) the Fair Market Value of such Shares on the Repurchase Date. … [A]ny termination of a participant’s employment for any reason shall occur on the date Participant ceases to perform services for Micro or any Affiliate without regard to whether Participant continues thereafter to receive any compensatory payments therefrom or is paid salary thereby in lieu of notice of termination [emphasis added].
[47] The Equity Plan provided:
Except as the Committee may at any time otherwise provide or as required to comply with applicable law, if the Participant’s employment with Micro or its Affiliates is terminated for any reason other than death, disability, or retirement, the Participant’s right to exercise any Non-Qualified Stock Option or Stock Appreciation Right shall terminate and such Option or Stock Appreciation Right shall expire, on … the sixtieth day following such termination of employment [emphasis added].
[48] The Equity Plan also gave an employee leaving by reason of death, disability, or retirement, the right to exercise his or her options for a one-year period. Further, it went on to define the date at which an employee ceased to perform services in a similar manner to the Restricted Plan as one made “without regard to whether the employee continues thereafter to receive any compensatory payments therefrom or is paid salary thereby in lieu of notice of termination.”
[49] The Rollover Plan provided:
Except as the Committee may at any time otherwise provide or as required to comply with applicable law, if the Participant’s employment with the Participant’s Employer or any of its Subsidiaries is terminated for any reason other than death, permanent and total disability, retirement or Cause, the Participant’s right to exercise any Non-Qualified Stock Option shall terminate, and such Option shall expire on… the 60th day following such termination of employment [emphasis added].
[50] The Rollover Plan went on to provide for different results dependent on the reason for cessation of employment. If the employee left by reason of death, disability or retirement, the employee was given the right to exercise the options for one year post‑employment. In contrast, if an employee was terminated for cause, his or her stock options immediately expired.
[51] Finally, under General Provisions, the Rollover Plan provided that the employer could dismiss the employee at any time “free from any liability or any claim under the Plan or otherwise, unless otherwise expressly provided in the Plan or in any Option Agreement.”
[52] While this plan did not specifically address, as did the Restricted and Equity Plans, a situation where the employee was given compensatory payments in lieu of notice of termination, it did contemplate dismissal for cause.
Given the wording of the plans and that each one contemplated the possibility of termination without cause, the claims failed.
This issue again went to the Court of Appeal in Love v Acuity, a decision released in February of 2011. The plaintiff was successful at trial before Moore, J. The issue with respect to equity was the date to be used for valuation, being the termination date or the expiry of the period of fair notice, set by the trial judge at 5 months. The governing document read as follows:
The Investment Agreement between the appellant and the respondent was effective as of August 31, 2004. The preamble sets out the purpose of the agreement:
AND WHEREAS if Love is no longer an employee of Acuity, Love must offer to sell all the Shares upon the terms and conditions contained in this Agreement.
[38] Paragraph 1 provides the parties’ agreement that the appellant would acquire 200 class B shares in the respondent on August 31, 2004.
[39] Paragraph 2 sets the price to be paid by the appellant.
[40] Paragraph 3 sets out the respondent’s right to repurchase these shares. It fixes the date triggering that right and as of which the share valuation process is to take place. That date is defined as the date the appellant “ceases to be an employee” of the respondent. In full, paragraph 3 reads as follows:
Purchase of Shares
(a) Subject of paragraph 4 hereof, if at any time:
(i) Love’s employment is terminated by Acuity without cause; or
(ii) Love should cease to be an employee of Acuity by reason of death or disability,
then subject to paragraph 3(b), Love agrees that Acuity shall have the option (but not the obligation) to purchase the Shares for a purchase price, determined at the date that Love so ceases to be an employee of Acuity, calculated as follows:
The value of each Share will be an amount equal to the “Acuity Value” divided by the total number of outstanding shares in the capital of Acuity at the time such value is being calculated. The “Acuity Value” is equal to one and one-half (1½) times the revenue that Acuity estimates will be realized by Acuity during the following twelve (12) month period from the assets under administration at the end of the calendar quarter in which Love ceases to be an employee of Acuity, subject to an adjustment for any extraordinary or non-recurring items during such calendar quarter. For purposes of this agreement, a calendar quarter is a three (3) month period ending on either March 31, June 30, September 30 or December 31.
Such option may be exercised by notice to Love from Acuity within sixty (60) days from the date that Loves ceases to be an employee of Acuity.
(b) Subject to paragraph 4 hereof, if at any time:
(i) Love should voluntarily terminate his employment with Acuity; or
(ii) Love’s employment should be terminated by Acuity for cause,
then Love agrees that Acuity shall have the option (but not the obligation) to purchase the Shares for a consideration that is 10% less than the amount that would be payable has such Shares been purchased pursuant to paragraph (3)(a). [Emphasis Added.]
The Court of Appeal reversed the trial judge on this issue, holding that this agreement contemplated the rights of Love in whatever manner his employment ceased. Love’s application for leave to appeal to the Supreme Court of Canada failed.
The Ontario Court of Appeal reversed the motions judge in its 2012 decision by holding that the agreement was effective in terminating share rights on termination of employment and negating the need to read in fair notice. The words read as follows: 4
A Shareholder whose association with the Corporation and its Affiliates ceases by reason of termination by the Corporation of his/her employment with the Corporation and its Affiliates shall, immediately after such termination, be deemed to have given a Transfer Notice covering all of the Shares held by him/her on a date which is 30 days from the date he/she is notified of such termination by the Corporation.
The Court continued:
In this case, the respondent’s claim to the dividend does not arise from the breach of his contract of employment. Rather, we were determining the respondent’s rights as a shareholder of Morrison Hershfield Group Inc. pursuant to the Shareholders’ Agreement. In that regard, it is of importance to remember that the respondent did not receive his shares in Morrison Hershfield Group Inc. as some form of compensation as an employee of the appellant. To the contrary, the respondent was given the opportunity to use his own funds to purchase shares in Morrison Hershfield Group Inc. When he elected to do so, the respondent’s rights regarding his shares were dictated by the terms of the Shareholders’ Agreement.
Buchanan v Geotel, as referenced above, was a May 2002 decision of Ferguson, J. of the Ontario Superior Court. It also involved an interpretation of the plaintiff’s rights under a stock option agreement, the wording of which read as follows:
Exercisability. The Option shall be exercisable only to the extent that the right to purchase shares under the Option has accrued and is in effect on the date the Optionee ceases to be an employee of the Company.
No Special Employment Rights. Nothing contained in this Agreement shall be construed or deemed by any person under any circumstances to bind the Company to continue the employment of the Optionee for the period within which this Option may be exercised….
Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws.
The provisions of the plan allowed the plaintiff to accrue additional options for each successive month of employment. The court found that while Buchanan was not entitled to accrue any further options over the notice period, his existing options which he held as of the termination date should be valued as of the end of the common law notice period. The court found that the wording of the stock option “ceases to be an employee” was ambiguous resulting in the judge’s decision to apply common law notice. (see also Saalfeld v Absolute Software B.C. Court of Appeal)
This issue was again considered by the Ontario Superior Court in January of 2019. 5. The document in question stated that the RSU and/or stock options shall be “cancelled immediately without consideration”. The trial judge, as was upheld by the Court of Appeal found that these words did not amount to a “clear, express provision that removes the common law right”.
The Court of Appeal confirmed that the test is to determine if there is language which specifically removes the common law entitlement:
If a common law right is established, “the question at this stage is whether there is something in the language of the [contract] between the parties that takes away or limits that common law right”: Taggart, at para. 20. In the context of a stock option plan, therefore, the question is whether there is language in the plan that specifically removes the employee’s common law entitlement. As noted by van Rensburg J.A. in Paquette, however, “[t]he question is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights”: at para. 31. In undertaking this analysis, the proper focus is on the wording of the particular plan: Kieran, at para. 58, citing Brock v. Matthews Group Ltd. (1991), 43 O.A.C. 369, at para. 22.
The Synthesis
The test then on a grand scale, is as follows, as stated by the Court of Appeal:
A useful summary of the principles set out in Taggart, Lin, and Paquette is provided in Manastersky, at paras. 39-43. At the risk of paraphrasing Brown J.A., in light of the foregoing analysis, I would further summarize as follows:
A wrongfully dismissed employee is entitled to damages for the loss of wages, salary and other benefits, that would have been earned during the reasonable notice period.
This principle applies to bonuses, stock options, or incentives that are an integral part of the employee’s compensation, as well as pension benefits that would have accrued or been earned during the reasonable notice period.
In considering whether the loss of such benefits is recoverable, the court undertakes a two-step analysis.
The first step requires a determination of the employee’s common law right to damages for breach of contract, bearing in mind that the measure of damages is the amount to which the employee would have been entitled had the employer performed the contract.
The second step requires the court to determine whether the terms of the relevant contract or plan unambiguously alter or remove the employee's common law rights, having regard to the presumption that the parties intended to apply the law, in the absence of clear language to the contrary.
None of this is shocking. The principles have been well founded.
The Hobby Horse (again)
The curious question is how it may be that a stock option or similar plan is not a form of monetary compensation as is caught by the Employment Standards Act. The cases allowing for immediate termination of the options do not address this.
The cases which allow the immediate termination of share rights distinguish the share contract from the employment relationship. To come to the conclusion that such plans are not part of the compensation plan given to the employee is odd. This issue remain unaddressed.
The issue of mitigation is reviewed here.