Stock options, restricted share units (“RSUs”), long-term incentive plans (“LTIPs”), bonuses, and other non-traditional compensation structures can comprise a large portion — even a majority — of an executive’s compensation. The increasing dominance of employee stock options has led to more litigation in this area in recent years as new and more nuanced questions arise regarding what happens to particular stock options upon the end of an executive’s employment with a company. So, what is an executive facing termination or resignation to do? Read on to find out some key considerations for executives in Canada nearing the end of employment.
If Your Employment Has Been Terminated, Don’t Sign Anything on a Whim
Recent cases have suggested that Ontario courts are increasingly unlikely to uphold contracts or incentive plans that slash employees’ compensation over their common law reasonable notice periods unless they expressly and unequivocally contract out of that entitlement.
O’Reilly v Imax: Catch-All Language Will Not Limit Employees’ Rights
The recent Ontario Superior Court case of O’Reilly v Imax Corporation, 2019 ONSC 342 demonstrated Ontario courts’ reluctance to uphold punishing contracts that significantly diminish employees’ compensation over their notice period. In O’Reilly v Imax, a 53-year-old, high-ranking executive, Mr. O’Reilly, worked at Imax for 22 years before being terminated without cause. Mr. O’Reilly filed a claim against Imax for wrongful dismissal. This case dealt with a number of different issues, but one question considered was whether Mr. O’Reilly was entitled to damages for the lost value of various stock option grants that would have vested during his reasonable notice period.
Mr. O’Reilly was compensated in part through an LTIP, which was comprised of RSUs and stock options, and a Stock Option Plan. Upon his termination, he was not permitted to take advantage of the yet unvested RSUs and stock options. Mr. O’Reilly argued that the Restricted Share Units and stock options that he received from Imax were fundamental to his compensation and claimed damages for the unvested RSUs and stock options that would have vested during his notice period, which the Court determined to be 24 months.
Imax argued that Mr. O’Reilly was not entitled to any damages with respect to unvested RSUs or stock options because of an Award Agreement signed by Mr. O’Reilly. This plan stated:
In the event that the Participant’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. Any vested RSUs shall continue to be settled on the applicable Settlement Date (bold italics added by Superior Court Judge).
Mr. O’Reilly’s Award Agreement contained similar clauses pertaining to stock options under the LTIP and Stock Option Plan. Imax therefore argued that Mr. O’Reilly’s RSUs and Stock Options had ceased to vest immediately and without consideration because of his termination, and that all unvested RSUs or Stock Options should therefore be cancelled and revert back to IMAX.
The Judge agreed with Mr. O’Reilly and found that his stock options would have vested within his 24-month notice period and that they were an integral part of his compensation. The Judge further found that the clauses did not unambiguously oust Mr. O’Reilly’s common law rights, as “terminates for any reason” cannot be presumed to include termination without cause. As a result, Mr. O’Reilly had a common law entitlement to the RSUs and stock options. The Judge further accepted the Plaintiff’s submissions that he would have exercised the stock options at the earliest possible opportunity. Therefore, Mr. O’Reilly was awarded damages for the lost RSUs and stock options that would have vested during the reasonable notice period had his employment not been terminated without cause
If you are participating in an LTIP, think twice before signing a release: your LTIP benefits — as well as many other benefits, variable compensation, and non-traditional compensation — should continue through your notice period. Prior to signing any severance package or agreement, consult with an employment lawyer.
Understand Your Compensation Policy and the Reality of What It Means
Depending on terms of your compensation plan, your right to exercise your stock options may change with your employment status. For example, if you quit prior to your stocks vesting, meaning you cannot have yet exercised them, you may no longer ever be able to exercise those stocks. In that case, that portion of your compensation is essentially null. Similarly, depending on terms of contract, might have a grace period after leaving the company to exercise vested options. This supersedes any previous expiry date. In most circumstances, if you miss that date, regardless of when the original expiration date is, you might have essentially forfeited your ability to exercise the option.
Compensation plans, when drafted well, are enforceable contracts. Sometimes, no amount of legal battles can displace the reality of the contract. Accordingly, executives should be proactive and negotiate their employment contracts, stock option plans, LTIPs, and STIPs prior to signing contracts.
Carras v Altus Group: Dangers of Signing an Unfavourable Compensation Contract
The dangers of signing an unfavourable compensation contract were demonstrated in the Ontario Superior Court case of Carras v Altus Group Limited, 2020 ONSC 2936. There, Mr. Carras sold his company to Altus Group and signed a contract stating that he would receive 50,000 in stock options after three years of service with Altus. The contract stated:
“except as otherwise provided herein, you must be actively employed with the Company on the last day of the Term or you must have entered into and be providing services to the Company under a consulting agreement on the day that would have been the last day of the Term.”
A later agreement stipulated that if Mr. Carras was terminated without cause before the three years was up, any unvested stock options would vest and would become exercisable.
Mr. Carras worked for Altus for one year before transferring into an independent contractor status. He worked for another year before leaving the organization for another opportunity. Upon leaving, Mr. Carras alleged that he had been constructively dismissed and was therefore entitled to his shares. The Judge disagreed. The Judge found against Mr. Carras, stating that he had “left for greener pastures” and was therefore not entitled to his stock options.
This case demonstrates the importance of doing your due diligence. Prior to signing anything, be it an original compensation plan or subsequent amendments, consult with a qualified employment lawyer to understand the repercussions of singing your compensation contract and to make and negotiate any changes required to structure your compensation plan more favourably. Re-read your contract before making any significant career changes. Be proactive, particularly when it comes to resigning, as resigning from employment and your reasons for doing so may change your entitlements.
Bowen v. JC Clark Ltd.: Discretionary Bonuses Must Be Distributed Fairly and Reasonably
In Bowen v. JC Clark Ltd., 2022 ONCA 614, the Ontario Court of Appeal made it clear that employees are still entitled to receive discretionary bonuses, even upon termination.
In Bowen v. JC Clark Ltd., the Appellants were portfolio managers of a hedge fund when it was acquired by the Respondent in 2012. The Appellants were hired by the new company during the acquisition and their tenure with the Respondent spanned from December 3, 2012 to July 16, 2014. The Appellants were terminated without cause and were each given two weeks salary plus $577 in lieu of notice. The Appellants sought $1.3 million in performance fees owed for their employment during 2014 before their termination. The trial judge dismissed their claim, and the Appellants are appealing this decision.
The Ontario Court of Appeal determined that the trial judge had erred by refusing to allow the Appellants to argue for their entitlement to a discretionary bonus, outlined in their employment agreements. Upon termination, the Appellants did not receive any discretionary bonus for the period from January 1, 2014 to July 16, 2014, and they only received $577 for the period between July 17, 2014 to July 31, 2014. While these bonuses were discretionary, the court emphasized jurisprudence that affirmed there is an implied term within every agreement that discretionary compensation will be applied in a fair and reasonable manner. As Justice Copeland noted, “This was not a fair and reasonable exercise of the employer’s discretion in all of the circumstances”.
Evidence before the court indicated that discretionary bonuses were awarded based on three components: 1) corporate performance, 2) individual performance, and 3) other factors. It was evident that portfolio managers at the company received discretionary bonuses for 2014 and the Appellants brought in remarkable returns while employed with the company and managing the fund. With all of this in consideration, Justice Copeland determined that the Appellants should have received discretionary bonuses pro-rated for the seven months they were employed by the Respondent.
This case has highlighted the importance of considering all forms of compensation upon termination. As demonstrated in Bowen v. JC Clark Ltd., discretionary bonuses do not give employers unconstrained discretion in awarding this form of compensation. Upon termination, in order to discharge their obligation to exercise their discretion fairly and reasonably, employers may have to award to the dismissed employee a discretionary bonus in the same range awarded to the similarly-situated employees.
Matthews v Ocean Nutrition: Supreme Court of Canada Awards Long Term Incentive Payment during Notice Period
Changes may be underway for employees who are compensated in part through stock options, LTIPS, bonuses, and other types of executive compensation.
As Andrew Monkhouse recently wrote, the Supreme Court of Canada heard the case of Matthews v Ocean Nutrition Canada in 2019, which focused specifically on executive compensation and LTIPs. Mr. Matthews was a long-term senior chemist with Ocean Nutrition who opted to participate in an LITP that would be triggered should the company be sold whilst he was still employed. After a series of job changes, Mr. Matthews resigned. Shortly thereafter, the company was sold.
At trial, the Nova Scotia Supreme Court found that Mr. Matthews had been constructively dismissed. The Trial Judge awarded Mr. Matthews a 15-month notice period as well as his $1,086,893 LTIP payout, which would have vested during his notice period, despite an exclusionary clause that purported to disentitle employees who were not “actively employed” from receiving the LITP. Ocean Nutrition appealed the matter to the Nova Scotia Court of Appeal, which upheld Mr. Matthews’ 15 month notice period but reversed the ruling regarding the LTIP, finding that Ocean Nutrition’s termination clause was valid and disentitled Matthews from the payout.
The Supreme Court of Canada allowed Mr. Matthews’ appeal and restored the decision of the Nova Scotia Supreme Court. Mr. Matthews was entitled to the $1,086,893 LTIP payout. This decision clarified that generally an employee is entitled to the stock options, LTIPs, bonuses and other delayed compensation that would have been earned had he been working during the notice period. To read more about this case, visit our Supreme Court Appearances page.
Going Forward: Key Points To Consider When Negotiating Executive Compensation
The above cases demonstrate the importance of a few key points for executives to consider when negotiating their compensation:
– Simply because a contract purports to limit your rights does not mean it is so. Contracts have defects, and sometimes these defects can be fatal to a clause’s validity.
– If RSUs, stock options, bonuses, or other non-traditional compensation comprise a significant portion of your compensation, it is well worth it to have a lawyer review your options and your contract before you make any moves. This allows you to be strategic in how you part ways with your employer.
The experienced, specialized employment lawyers at Monkhouse Law leverage their expertise to best represent your interests. For more information or to discuss your rights and potential options when negotiating your employment contract, compensation plans, or severance agreements, contact Monkhouse Law.
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