Ambiguity in Stock Options, Restricted Share Unit Plans: Latest from Court of Appeal

The Ontario Court of Appeal has again weighed in on the issue of entitlement to wrongful dismissal damages for loss of stock options and restricted share units (RSUs).

In O’Reilly v. IMAX Corporation 2019 ONCA 991, the court acknowledged that the topic of a wrongfully dismissed employee to exercise stock options, receive bonuses or take advantage of other aspects of the employee’s compensation package during the reasonable notice period remained the subject of increasingly frequent litigation. In 2019 alone, the Court of Appeal issued at least four decisions on the topic: Dawe v. The Equitable Life Insurance Company 2019 ONCA 512; Mikelsteins v. Morrison Hershfield Limited 2019 ONCA 515, Manastersky v. Royal Bank of Canada 2019 ONCA 609; and Andros v. Colliers Macaulay Nicolls Inc. 2019 ONCA 679.

O’Reilly involved an executive, Larry O’Reilly, who had been employed with IMAX Corporation for 22 years. At the time of dismissal, his compensation included awards for restricted share units (RSUs), stock options and a separate stock option plan. He was advised by IMAX that any awards that had not vested as of 30 days from his last day of work would be cancelled and forfeited without any consideration.

The RSU plan language stated in part that in the event that the employee’s employment “terminates” for any reason other than for cause, disability or death, RSUs “shall cease to vest” and any unvested units were to be “cancelled immediately without consideration as of the date of such termination.” The stock option plan language mirrored the RSU plan and stated further that any unvested options “revert back to the Company for no consideration and the [employee] shall have no further right or interest therein.”

O’Reilly claimed that the RSUs and stock options were a “fundamental” part of his compensation and that he was entitled to damages for the lost opportunity to exercise those awards which would have vested during the reasonable notice period.

The summary judgment motion judge agreed with him stating that the “damages for the loss of the awards should be calculated on the basis of what would have probably happened had he remained employed until the end of the notice period.” The motion judge found that the disputed plan language was not enough to cancel O’Reilly’s entitlement to exercise them or to remove his entitlement to damages for their loss.

On appeal in O’Reilly, IMAX argued that the language of the plan documents was sufficiently clear to rebut the presumption that the employee is entitled to damages for the loss of options and RSUs that would have vested over the common law notice period. Relying upon the Court of Appeal decision in Kieran v. Ingram Micro Inc. [2004] O.J. No. 3118, IMAX claimed that O’Reilly’s unvested awards should also be found to have ceased to vest on the effective date of his termination.

The Court of Appeal disagreed with IMAX, holding that “[w]hile the language in all the plans at issue in this case extinguish the respondent’s right to exercise any unvested awards as of the date of “termination” or when employment “terminates”, they do not establish, in unambiguous terms, when the date of termination is or when employment terminates.” [Emphasis added]

The Court of Appeal found key differences as between the IMAX plan and the plan language in Kieran. Of significance, in Kieran, the company plan contained additional terms clarifying that termination took place upon the date the employee ceased to perform services and without regard to whether the employee received any salary in lieu of notice.

Further, the plan stated that upon dismissal without cause, the employer was free from any liability or claim under the plan, therefore disentitling the employee to claim damages for the loss of RSUs and options.

Language such as “termination” or “cessation of employment,” without more, was insufficiently clear to prevent a claim for the RSUs and options that would have accrued over the reasonable notice period. As the language in O’Reilly allowed for the possibility that termination could have occurred at the end of the reasonable notice period, the Court of Appeal noted that where such ambiguity is present, the language will be interpreted as mandating a lawful termination.

Conclusion

Although the area of bonus plans, stock option plans and incentive plans remains “fertile ground for litigation,” O’Reilly reaffirms the following well-established principles which aid both employers and employees:

1. A wrongfully terminated employee is entitled to damages for loss of compensation that he or she would have earned during a reasonable notice period. This applies to bonuses, stock options, restricted share units and incentives which form a fundamental part of an employee’s compensation which would have been earned or accrued during the reasonable notice period.

2. To determine whether these damages are recoverable, the court undertakes a two-part analysis. First, it determines whether there is a common law right to damages, the quantum being what the employee would have been entitled to had the employer performed the contract. Second, the court looks at whether the terms of the relevant plan “unambiguously” alter or oust the employee’s common law rights, taking into consideration the presumption that the parties intended to apply the law in the absence of clear language to the contrary.

The specific terms of the plan should be critically examined by employment counsel in assessing the value of a wrongful dismissal claim. Equity and incentive plans will be held to a high standard of precision and should clearly define when entitlements terminate under the plan, what happens to both vested and unvested units and set clear deadlines for the exercise of vested options. Consistent with well-established principles, any ambiguity in the language will be construed in favour of the employee as was the case here in O’Reilly.

“Previously published by The Lawyer’s Daily (www.thelawyersdaily.ca) a division of LexisNexis Canada”

By |2020-09-03T03:56:10-04:00January 14th, 2020|Article-All|0 Comments

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