Entitlements to Unvested Stock Options After Termination

Where stock options or restricted share units (RSUs) form a large part of an employee’s compensation, the question of whether that compensation should continue over the reasonable notice period becomes increasingly important. This article aims to answer that question by explaining the key factors the Ontario Courts consider in interpreting stock option plans and deciding whether a wrongfully dismissed employee should be compensated for those lost Unvested Stock Options.

Many employers draft stock options plans with the intention of excluding terminated employees from unvested stock options. However, the starting position, under the law in Ontario, is that dismissed employees are entitled to all the wages, benefits and other forms of compensation he or she would have received had they been working through their reasonable notice period.

Limiting Entitlement to Stock Options and RSUs during the Notice Period

Similar to how companies may limit the length of reasonable notice, or the entitlement to bonuses, during the notice period, employers can, with properly drafted policies, limit an employees entitlements to stock options or RSUs during the termination notice period.

15 years ago, it used to be a lot easier for employers to limit employees’ entitlements to stock options over the notice period. For example, in a 2004 decision of Kieran v. Ingram Micro Inc., the Court denied an employee’s claim for stock option entitlements during the notice period because the employment agreement restricted these entitlements upon termination “for any reason”. The Court concluded this language sufficiently incorporated the employee’s without cause termination.

However, more recently, since at least the Courts decision of Paquette v TeraGo, the law in Ontario holds that employees are entitled to payments unless the language limiting the employee’s rights on termination expressly excluded payment of bonuses upon an employee’s termination without cause. Specifically, in that case, the Court determined that a term that required “active employment” when the bonus is paid, without more, was insufficient to deprive an employee of a claim for compensation for the bonus he or she would have received during the notice period. While this case dealt with bonuses, not stock options, the principles are the same for both.

Read my earlier article for more information on Entitlements to Bonuses after Termination.

Stock option limitations must be clear and unambiguous.

In a recent case, O’Reilly v Imax Corporation, the Court of Appeal for Ontario confirmed that the employer is obliged to pay, among other things, damages to the employee for the loss of unvested stock options unless there is express language in an employment contract or stock option plan or similar document, limiting an employee’s right to compensation for other forms of compensation such as Restricted Share Units, Stock Options during the reasonable notice period.

Whether such “express language in an employment contract or stock option plan” exists is often subject to serious scrutiny in the Courts. Entitlements to stock options at termination but only if the language is clear and unambiguous. The enforceability of these agreements depends on the particular circumstances of each case.

Stock option limitations must be drawn to the attention of the employee.

Battiston v. Microsoft Canada Inc highlights that having a well-drafted and legally compliant contractual provision may not be sufficient. In this case, the employee was awarded damages for the stock options that were scheduled to vest during the notice period because the employer failed to bring the limitations in the stock option plan after termination to the employee’s attention at the time he accepted the terms and conditions of the stock awards.

The Court considered the termination provisions in the Stock Award Agreements as “harsh and oppressive” since they barred Mr. Battiston’s right to have unvested stock awards vest if he had been terminated without cause. As a result, the court ruled “reasonable measures must be taken to draw harsh and oppressive terms to the attention of the employee.”

So, in addition to clear and unambiguous language in agreement terms, the Courts hold that any harsh or negatively restrictive conditions contained within those documents must be explicitly communicated to the employee.

Conclusions

In summary, Canadian courts have made it clear that unless companies are extremely careful in the wording of stock option plans, these plans will be interpreted to allow employees dismissed without cause to accumulate and exercise their stock options until the end of the reasonable notice period. To avoid this outcome employers must make sure to use wording in the stock option plan that limits an employee’s right to exercise options after a certain point in time. In situations where careful and clear wording does not exist or where such limitations are not brought to the employee’s attention, Courts will interpret stock option plans against the employer and the trigger date for the termination of the options will not commence until the end of the reasonable notice period.