3 Key Considerations For Executive Compensation and Severance (Updated Nov 23 2020)

If you are an executive or senior-level employee nearing the end of your employment, you’ll want to carefully plan your next moves to ensure you have an exit plan that works in your favour. Because of the complexity of executive compensation, senior executives may be shortchanged when offered termination or severance packages.

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 nearing the end of employment.

1. Don’t Sign Anything on a Whim

Prior to signing any severance package or agreement, consult with a lawyer. 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

The Lesson

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.

2. If You Didn’t Know About That Clause, It May Be Unenforceable

It is your obligation to read, seek legal advice on, and understand your employment contracts.  However, Ontario courts do not take kindly to unfair play; if your employer has quietly added an unfavourable term to your compensation plan without explicitly drawing your attention to it, it may be unenforceable.

Dawe v Equitable Life Insurance: Shattering the Status Quo

This was the case in the Ontario Court of Appeal case, Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512. Mr. Dawe worked as Senior Vice President with Equitable Life for 37 years before being terminated without cause. Mr. Dawe sued for wrongful dismissal after Equitable Life denied him the bonuses that he would have earned through his notice period.

The Court of Appeal Judge agreed with Mr. Dawe on the issue of bonus payments through his notice period. Nine years before his termination, Mr. Dawe was asked to sign new compensation plans regarding Equitable Life’s LTIP and Short-Term Inceptive Plan (“STIP”). The plans introduced new provisions that substantially limited employees’ bonus entitlements in circumstances of resignation, termination for cause, retirement, death, and termination without cause. These plans were updated from time to time, after which Mr. Dawe received copies. Although Equitable Life demonstrated that Mr. Dawe had been provided with the LTIP and STIP, they could produce no evidence that the consequences of termination specifically were drawn to the attention of Mr. Dawe.

The Court of Appeal Judge found that Mr. Dawe’s bonuses were an integral part of his compensation and that the changes to his compensation had not been properly communicated. Accordingly, Mr. Dawe was awarded his bonuses through the 24-month notice period because the language in the contract had not been explicitly pointed out to him. This was found despite the Appeals Judge acknowledgement that Mr. Dawe may have been familiar with the termination clause because, as part of his employment duties, Mr. Dawe had signed-off termination packages of other employees.

Battiston v Microsoft Canada: A Major Win by Monkhouse Law for Employees

Dawe was reaffirmed in Battiston v Microsoft Canada Inc., 2020 ONSC 4286, a recent case argued by Andrew Monkhouse and Samantha Lucifora.  There, Monkhouse Law successfully argued that an employer’s stock plan, which disentitled terminated employees to their unvested shares, was “harsh and oppressive” and ultimately unenforceable, largely because the employer did not alert the long-term employee to the clause’s introduction.

Battiston is notable because it effectively renders ineffective the status quo which many reputable employers reply on in limiting employees’ rights to bonuses upon termination. Many companies use the system that Microsoft was using in Battiston to ensure that they have done due diligence of alerting employees to changes in their compensation structure.  However, the Ontario Superior Court affirmed that even this high-water mark is insufficient.

In Battiston, Monkhouse Law was successful in obtaining Mr. Battiston’s raises in salary during his 24-month period. Additionally, the Court awarded Mr. Battiston his average bonus during the notice period and his shares that were awarded but remained unvested at the time of Mr. Battiston’s termination.

The Lesson

These cases demonstrate the obligation on employers to not only provide you with information regarding your rights upon termination but also to clearly and openly communicate this information with you. 

Although these two cases do not act as a shield for employees who simply neglect to conduct due diligence in reading and understanding the terms of their employment, they do suggest that simply receiving a contract from your employer with information regarding termination may not be enough to effectively limit your entitlement to bonus continuation through your notice period. 

3. Understand Your Compensation Policy and What It Really 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 the 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’ve 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.

The Lesson

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.

Matthews v Ocean Nutrition: Supreme Court awards bonus earned during common law notice period

Changes may be underway for employees who are compensated in part through stock options, LTIPs, bonuses, and other types of executive compensation.

In 2019, the Supreme Court of Canada heard the much anticipated case of Matthews v Ocean Nutrition Canada, 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 LTIP 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’ notice period but reversed the ruling regarding the LTIP, finding that Ocean Nutrition’s termination clause was valid and disentitled Mr. 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 brought much needed clarity to how stock options, LTIPs, bonuses and other delayed compensation should be treated when a worker is terminated.

The lower courts had given Mr. Matthews 15 months of reasonable notice. This meant that for a person in his position and circumstances, it would take about 15 months to find a comparable position. Like any other employer, Oceans could have kept him on as an employee for those 15 months or paid him the salary that he would have received during that time and terminated him immediately. The Supreme Court explained that the logical extension of that understanding is that Mr. Matthews should have also been entitled to any other compensation that he would have gotten if he had continued working for 15 months.

The remaining question, then, was whether something in Mr. Matthews’ contract stipulated that he was willing to forgo what he should have received under the common law in those 15 months. The Supreme Court found that it had not. Mr. Matthews was given a unilateral contract, in that Mr. Matthews could not negotiate the terms of the LTIP and the LTIP terms did not contemplate these particular circumstances (unlawful termination). Therefore, Mr. Matthews could not have been said to have agreed to not being paid his LTIP in the instance that he was unlawfully constructively terminated.

The Lesson

The key takeaway from Matthews is that the Supreme Court has stated that employment contracts create an obligation to give a reasonable amount of notice before the termination of the contract. For employees, this means that “pay in lieu of notice” is not just a lump sum of money, it truly represents what a person should have received if they worked through that notice period, including LTIPs or other incentive plans.

Going Forward

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.
  • Get a contract review to structure things more favourably for yourself.
  • Stay abreast of upcoming changes in the law and how they impact your current contracts.

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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