Stock option rights sticky subject in wrongful dismissals

By Melanie Polowin
|Canadian HR Reporter|Last Updated: 04/12/2001

Employers should be aware of rights arising under employee stock options plans (ESOPs) since they are popular — and expensive — subjects of dispute in wrongful dismissal litigation.

Despite a growing trend to grant stock options as part of a standard compensation package for all employees, from mailroom staff to presidents, companies generally do not want ex-employees to retain a stake in the company after they leave. Therefore “termination of employment” clauses in ESOPs commonly provide that termination of employment triggers the following:

•a time-limited exercise window for the forced sale of those options already given as of the trigger date; and

•the immediate loss of any options not yet given as of the trigger date.

What employers and ex-employees are fighting about is this: When an employee is terminated without cause, what is the operative trigger date? Employees argue that the trigger date is the last day of the common law reasonable notice period. Employers argue that the trigger date is the day the employer says the employment relationship is at an end.

The courts uniformly pay lip service to the principle that the particular language of the ESOP will be determinative. The case law has evolved in two directions. The first (exemplified by the 1990 decision of the Ontario Court of Appeal in Brock vs. Matthews Group Limited) emphasizes the traditional principles of strict contract interpretation.

The second (exemplified by the 1976 decision of the Alberta Court of Appeal in Hardie vs. Trans-Canada Resources Ltd.) emphasizes an increasingly familiar theme of Canadian employment law — no advantage will be granted to an employer who provides inadequate notice of termination.

In practice, the two approaches are now converging. By finding room to “interpret” these ESOP clauses, courts can read in a requirement that “termination” cannot mean “wrongful termination,” so the trigger date occurs upon expiry of the reasonable notice period. Therefore, seemingly “clear” ESOP language, such as “in the event of the employee ceasing to be an employee for any reason other than death, disability, or retirement...,” and “whether such termination be voluntary or involuntary” has resulted in the date of termination being interpreted as the end of the reasonable notice period.

What can employers do to minimize the risk of an unfavourable court interpretation? Some useful precautions are listed below.

•Decide consciously what, if any, rights employees should retain in each foreseeable “end” scenario: death, disability, retirement, change of control, corporate bankruptcy or insolvency, voluntary or involuntary termination, with or without cause and with or without any or adequate reasonable notice.

•Review (and where practical revise) all relevant documentation (the ESOP itself, the option grant document and any related materials provided to employees) to ensure compliance with employment standards and human rights legislation. This also reduces any room for a court to imply terms that are contrary to the intention of the employer.

•Provide clear, explicit and consistent language in all ESOP-related documentation. Whether in the definition or interpretation section of the ESOP, or in the termination clauses themselves, the ESOP should expressly define the trigger date. Tying the trigger to the expiry of any period of statutory notice is one good way of reducing the risk of a challenge.

•Review hiring and firing documentation, practices and policies carefully. At the hiring stage, any reference in an offer letter to stock options should be couched in properly qualified language. For example, if board approval is prerequisite, if the employer can only recommend not grant, or, if the option rights are governed by the ESOP, not the hire letter, then the offer letter should clearly state these facts.

•Specify in offer letters (and the ESOP itself) that a new employee’s eligibility for grants under an ESOP arises only upon successful completion of any initial probationary period.

•Disclose the provisions in the ESOP documents up front, particularly, any adverse termination provisions with the offer letter, and before the offer is accepted. As with any contractual dispute, what matters is not only what the contract stated about rights upon termination, but also if and when and how during the hiring process those contractual rights were explained to the employee.

•Apply termination practices and policies consistently, and update them regularly to ensure compliance with evolving legal standards. This forethought and planning will reduce the risk of allegations “of bad faith.” Such allegations are fashionable these days, and employees may look to the timing of a termination, and its effect on any pending vesting of options, to bolster a “bad faith” allegation.

It often seems to frustrated employers that courts invariably favour a dismissed employee. While employers cannot avoid the court’s fine hand, an aware and informed employer can at least even the odds.

Melanie Polowin is an associate specializing in employment law at the Ottawa offices of Osler, Hoskin & Harcourt, a full-service national firm. She can be reached at (613) 787-1003, or by e-mail at mpolowin@osler.com.

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