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18 March 2020
Stock options and restricted share unit (RSU) plans are used by employers to attract, reward and retain employees for the long term. While these tools can be useful, such plans should include unequivocal language limiting entitlements on termination of employment to avoid significant liability for employers.
In O'Reilly v IMAX Corporation (2019 ONCA 991), the Ontario Court of Appeal recently provided guidance on the enforceability of provisions of stock options and RSU plans that purport to limit the entitlements of an employee on termination.
The employee, Mr O, had 22 years' service, was 53 years old and held a senior executive level position with the employer at the time of termination. His compensation package included participation in a long-term incentive plan (which included RSUs) and a stock options plan (collectively, the 'stock plans'). In a wrongful dismissal action, the lower court determined on summary judgment that the employee had been wrongfully terminated and awarded 24 months' reasonable notice. Among other things, the employee was awarded damages for the lost opportunity to exercise awards that would have vested under the stock plans during the reasonable notice period.
The employer argued that the relevant provisions of the stock plans extinguished the employee's right to any unvested awards following termination of employment and that the employee should therefore not receive damages for the lost opportunity to exercise unvested awards that would have vested during the notice period. The stock plans stated that:
[i]n the event the [employee's] employment with the Company terminates for any reason other than death, Disability or for Cause the RSUs shall cease to vest and any unvested RSUs shall be cancelled immediately without consideration as of the date of such termination.
The motion judge disagreed with the employer's position and determined that the stock plans did not sufficiently preclude the vesting of awards during the reasonable notice period. The employer appealed the lower court's decision.
The Court of Appeal reviewed leading decisions considering the enforceability of stock options plan language limiting an employee's entitlements on termination of employment. In summarising these decisions, the Court of Appeal outlined the following principles to be considered when evaluating the enforceability of such language:
Applying these principles to the language in the relevant stock plans, the Court of Appeal concluded that the phrase "employment… terminates for any reason" failed to unambiguously establish the date of termination and, as such, left open the possibility that the termination date was the end of the reasonable notice period. As a result, the court dismissed the employer's appeal and concluded that "terminates for any reason" was intended to comply with the law and that the termination date was thus the end of the notice period. As such, the employee was entitled to damages for the lost opportunity to exercise awards that would have vested under the stock plans during the 24-month notice period.
Employers which provide employees with incentive compensation in the form of stocks and RSUs could face significant costs when terminating employees. When determining an employee's entitlements on termination of employment, any ambiguity will lead the courts to interpret contractual language in favour of the employee.
Employers may reduce liability by drafting and implementing stock options and RSU plans with the following principles in mind:
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