Stock Options

The right to receive and exercise stock options can be important considerations in an employment agreement. It is not unusual to see the profits from the options outweigh the significance of direct compensation. Typically the option agreement will require a time period for the options to vest, such as five years from the date of the grant, usually at a fixed percentage, such as twenty percent per year.

Default Setting

On termination of employment, unless the agreement states to the contrary, common law will generally allow for enhancements to the value of existing vested options and the right to vest additional options during the notice period.

Hence, Enter the Contract

The employment contract then must not only address the issue of severance but also the stock option plan. The agreement should define what impact the termination clause may have upon the existing options, whether such options are vested or nearly vested.

The Statute

Under Ontario law and only Ontario law, the Employment Standards Act (ESA) requires all benefits be continued for the statutory period. This is an issue often forgotten by the drafters of stock options agreements in which the usual wording ends the right to accrue option rights “with or without cause”, as discussed below.

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.

Might the stock option plan be a “term or condition of employment” as referenced in the ESA? 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?

Caselaw

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.

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. In this sense, it is “obiter dicta”.

This decision should not be considered to be instructive of the point. It is, with respect, likely wrong.

The Law on the Agreement & Options

Absent this issue, cases dealing with the common law argument for reasonable notice to be applied to the stock options 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 an incremental fair notice adjustment where the words of the document are clear and precise to define no entitlement in whatever circumstance employment ends. The general synthesis which comes from these cases is that a careful drafting of the option document will accomplish this objective.[1]

A vivid example of this principle comes from 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 the 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 once again defined the rights of Love in whatever manner his employment ceased. The Court of Appeal reversed the trial judge on this issue and used the actual date of termination and not as extended by the five month notice period. Love’s application for leave to appeal to the Supreme Court of Canada failed. The statutory argument was not made. It should have been.

In all cases, there is an evident pervasive general theme. A term which contemplates the cessation of rights in clear language no matter how the termination of the relationship has come about, by resignation, termination with or without cause, will be effective, all of which is subject to statutory compliance in Ontario, as noted above.

Get Advice Before or After

The financial damage of a lost stock option claim can be dramatic. There is a further argument that an additional sum may be claimed for incremental tax on a successful claim. More of this later.

Whether you be an employer or employee considering the creation of a stock option agreement, get advice. If you are a Canadian employer which is a subsidiary of a foreign parent, do not presume the parent’s stock option agreement will hold water in a Canadian court. If you are an employee in a similar setting, preventive advice will guide your actions.

On termination, when the die is cast, let legal advice guide your actions. As an employer, a release provides even further solace than normal. As an employee, you need to understand your potential upside.  If you have questions about the stock option issues, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins. We regularly advise workplace parties on a wide range of legal workplace issues. Contact us online or by phone at 416 364 9599 to schedule a consultation.

[1] For example Ryan v Laidlaw, Veer v Dover, Brock v Matthews, Gryba v Moneta Porcupine Mines,  Kieran v Ingram Micro,   Saafeld v Absolute Software