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Dealing with stock options on dismissal

stocksA recent Ontario Court of Appeal decision released on February 16, 2011 dealt with a number of issues arising from the dismissal without cause or notice of a senior vice-president of an investment company. One of the more difficult issues addressed at trial, and considered by the Court of Appeal, was the trigger date for the right of the employer to re-purchase the employee’s two percent interest in the company.

At trial, the employee was awarded five months pay in lieu of notice. The trial judge also awarded damages for the loss of his shares of the employer, valuing the shares as of the end of the five month notice period. The employee appealed the trial judgment, arguing, inter alia, that the notice period of five months was too short. The employer cross-appealed on the basis that the appropriate trigger date for the purchase of the shares was the actual date of termination, rather than the end of whatever notice period was awarded.

The trial judge had reviewed the classic passage from the Ontario Court in Bardal v. The Globe & Mail, as to the determination of reasonable notice, and on that basis, assessed notice at five months. In his reasons, the judge seemed to focus on the employee’s short tenure with the company. However, in substituting a period of nine months for reasonable notice, the Court of Appeal held that the trial judge had erred in a number of areas. Firstly, he gave too much weight to the employee’s short length of employment. The Court of Appeal warned against treating dissimilar cases similarly by over emphasizing similarities in the length of service, based on the ease of comparing such length of service. The Court of Appeal felt that, by focusing on the length of service, the trial judge misapplied the case law in awarding only four or five months of notice. The Court of Appeal found that other factors which are to be considered in determining notice exhibited a wider variance of appropriate notice. For example, none of the cases relied on by the trial judge dealt with a senior executive, as was the plaintiff in this case.

Similarly, the Court of Appeal held that the trial judge gave too little weight to the character of the employee’s employment. In particular, the Court of Appeal focused on the fact that the plaintiff was one of only two senior vice-presidents, and reported directly to the Chief Executive Officer. As a high level employee, the Court of Appeal felt that the plaintiff was entitled to a longer notice period than that awarded by the trial judge. After considering the various factors from the Bardal case, the Court of Appeal increased the length of notice to nine months.

Having increased the notice period, the court then looked to the question of when the obligation to purchase of the employee’s shares would be triggered. The Court of Appeal overturned the trial judge’s ruling on this issue and held that the trigger date was the date of termination rather than at the end of the notice period. The Court of Appeal based this finding on the provisions of the Share Purchase Agreement which required the company to purchase the shares on the date the employee ceased to be an employee of the company. The issue to be dealt with was when that date arose. Was it the end of the period of reasonable notice, or on the date in which the plaintiff ceased working with the company? The Court of Appeal held that, in fact, it was the date on which he ceased to work for the company. Even though it was a termination without cause, it was clearly a termination of his employment. The Court found that at the end of his notice period represented the end point of his entitlement to compensation, but not the end point of his employment. This resulted in a significant reduction in the amount payable to the employee and, obviously, a victory for the employer.

It has been the writer’s experience that the provisions of stock grant and stock option programs often do not give sufficient consideration to the implications of the termination of the employee’s employment. It is often the case that the employer’s intentions as to how stock grants or stock options are to be dealt with on termination is, in fact, frustrated by improper drafting of the applicable plan provisions. The cost to unwary employers of such improper drafting can be significant. Legal advice should always be obtained to ensure the plan does what the employer intends it to so in the event of a termination.

Earl Altman
Garfinkle, Biderman LLP

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Earl Altman

Legal consultant at EA Consulting
Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more
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