Canadian Courts Speak Different Languages When Interpreting Stock Option Agreements

When an employer terminates an employee by providing the employee with pay in lieu of notice, rather than working notice, the employer becomes liable to pay the employee damages that place the employee in the position that he or she would have been had the employer provided the employee with working notice of dismissal. An employee who has been dismissed without being provided with working notice has been wrongfully dismissed.  A wrongful dismissal is considered to be an “unlawful” dismissal because it is a breach of contract.

An employer may limit the damages it is required to pay a dismissed employee upon dismissal by inserting language into the employment contract that limits the employee’s entitlement to damages upon termination. However, the courts will interpret the language used in any limitation clause in favour of the employee and will only limit the employee’s common law rights if the limiting language used is clear and unambiguous. The courts do so because the courts are reluctant to allow the employer to benefit from its wrongdoing (i.e. the wrongful dismissal). In this regard, a court will presume that the language used in a termination clause references a lawful termination (i.e. a dismissal in which the employee has been provided with working notice) unless the language clearly provides for a different interpretation.

The issue regarding what type of language is required to limit an employee’s entitlement upon termination is significant in Canada because many employers compensate their employees by providing the employees with stock options and bonuses that often form a significant part of the employee’s total compensation.   These stock option and bonus plans often contain termination provisions that seek to limit the employee’s entitlement to compensation under the plans if he or she has been dismissed. The problem faced by Canadian employers and employees, however, is the fact that Canadian courts have not been consistent in their interpretation of these agreements. Indeed, with the recent release of Love v Acuity Investment Management Inc., 2011 ONCA 130 it appears that the British Columbia Court of Appeal and the Ontario Court of Appeal have now split on the limitation language required to remove an employee’s entitlement to damages for an employer’s failure to provide reasonable notice of his or her dismissal.

In Acuity, the Ontario Court of Appeal considered the case of a senior vice president who had been dismissed without cause or notice. At the time of his dismissal, he was 50 years old and had been employed for two years and seven months. The plaintiff was also party to an investment agreement (the “Investment Agreement”) pursuant to which he acquired ownership of two per cent of a privately held company. Under the Investment Agreement, the company had the option of requiring the plaintiff to sell his shares back to the company when he was dismissed from his employment. The company, after dismissing the plaintiff, exercised its option to repurchase the shares. The company paid the plaintiff the value of his shares as of the date he was terminated. However, the trial judge reviewed the terms of the Investment Agreement and held that the value of the plaintiff’s shares should be calculated not as of the date the plaintiff was dismissed but at the end of his reasonable notice period.

On appeal, the court overturned the trial judge’s decision and held that the trigger date to determine the value of the plaintiff’s shares was not the end of the plaintiff’s period of reasonable notice but rather the date of his dismissal. In reaching its decision the court reviewed the termination provision found in the Investment Agreement which stated:

AND WHEREAS if Love is no longer an employee of Acuity, Love must offer to sell all the Shares upon the terms and conditions contained in this Agreement…

 

  • ….if at any time:
  • Love’s employment is terminated by Acuity without cause

 

  • Love agrees that Acuity shall have the option (but not the obligation) to purchase the Shares for a purchase price, determined at the date that Love so ceases to be an employee of Acuity…

 

Justice Goudge, writing for the court, stated at paragraph 45 and 46:

The Investment Agreement clearly applies to termination without cause of the appellant whether through the provision of reasonable notice or with payment in an attempt for not providing reasonable notice. The latter constitutes a wrongful dismissal, that is, a termination in breach of the employment contract. As such it is a termination that does not comply with the law, as that phrase is used in [. That is what happened to the [plaintiff] in this case.

I agree with the appellant and the responded that the appellant’s termination is encompassed by the Investment Agreement. The clear wording of the agreement extends to a termination without cause in breach of the employee’s contract of employment.

The court then considered the time when the plaintiff ceased to be an employee and determined that as a matter of “fact” (apparently from reviewing the language in the termination clause) the plaintiff ceased to be an employee on the date he was terminated from his employment. Therefore, the court held that the trigger date to determine the value of the plaintiff’s shares was the date of his termination. The language used in the Investment Agreement was sufficient to rebut the presumption of reasonable notice.

The court’s decision in Acuity does not, at first instance, appear to be consistent with earlier decisions of the appellate courts in Ontario or British Columbia. Based on earlier decisions, the words “ceases to be an employee” in the Investment Agreement can, arguably, be interpreted as referencing a lawful termination in which reasonable notice had been given. For example, in Kieran v. Ingram Micro Inc., 2004 CanLII 4852 (ONCA) another panel of the Ontario Court of Appeal reviewed the following termination provision in a stock option plan:

If Participant’s employment with Micro or any Affiliate is terminated for any reason other than death, disability … or retirement … prior to the time when all Shares have become Unrestricted Shares …, Restricted Shares … shall be repurchased by Micro at the lower of (x) the Purchase Price and (y) the Fair Market Value of such Shares on the Repurchase Date. … [A]ny termination of a participant’s employment for any reason shall occur on the date Participant ceases to perform services for Micro or any Affiliate without regard to whether Participant continues thereafter to receive any compensatory payments there from or is paid salary thereby in lieu of notice of termination [emphasis added]

The court in Kieran reviewed the clause and held that the clause was sufficient to rebut the presumption of reasonable notice. However, in reaching its decision the court wrote at paragraph 58:

This is not a plan such as the one examined by Kiteley J. in Schumacher v. Toronto-Dominion Bank (1997), 29 C.C.E.L. (2d) 96 (Ont. Gen. Div.) [Schumacher]. In that case, the “Phantom Options” contained contractual terms that negated the participant’s right to his options when he “ceases to be an employee”. A person ceases to be an employee, in the case of a wrongful dismissal, after the period of reasonable notice: see paras. 237-240. While a plan that addresses only “cessation of employment” may create an ambiguity, the plans at issue in this case do not. [emphasis added]

In Acuity, Justice Goudge directly addressed the perceived conflict between Acuity and Kieran finding that Kieran did not assist the plaintiff. Justice Goudge noted that the court in Kieran had found that the wording of that limitation clause applied to a “wrongful dismissal” (i.e. an unlawful dismissal) and the plaintiff’s entitlement to stock options “terminated” on the date he “ceased to perform services” without regard to whether he continued to receive compensatory payments or salary in “lieu of notice”. The courts comments at paragraph 58 of Kieran, Justice Goudge stated, simply referenced the trial judge’s decision in Schumacher, an earlier decision of the Ontario Superior Court of Justice.

The problem with the courts analysis in Acuity, however, is that the limitation clause in Kieran, unlike in Acuity, explicitly references a scenario in which the plaintiff receives pay in lieu of notice (ie. an unlawful dismissal). Again, the key sentence of the limitation clause in Kieran states:

[A]ny termination of a participant’s employment for any reason shall occur on the date Participant ceases to perform services for Micro or any Affiliate without regard to whether Participant continues thereafter to receive any compensatory payments there from or is paid salary thereby in lieu of notice of termination

In contrast, the limitation clause in Acuity is silent with regards to the plaintiff receiving pay in lieu of notice. The court in Acuity read into the limitation clause an unlawful dismissal.

Surprisingly, the court’s decision in Acuity is also difficult to reconcile with its earlier decision in Veer v. Dover Corporation (Canada), 1999 CanLII 3008 (ON CA). In Veer, Justice Goudge also delivered the judgopment of the court that considered the following limitation clause in a stock option agreement.

If the option holder’s employment with the corporation and/or a subsidiary, as the case may be, is terminated for any reason other than set forth in paragraphs 6, 7 or 8 above, whether such termination be voluntary or involuntary, without his having fully exercised his option, the option shall be cancelled and he shall have no further rights to exercise his option or any part thereof and all of his rights hereunder shall terminate as of the effective date of such termination. [Emphasis the courts]

In contrast to the court’s decision in Acuity, in Veer Justice Goudge made the following statement at paragraph 14:

In my view “voluntary” termination refers to a termination that is consensual or initiated by the employee, whereas “involuntary” termination is that initiated by the employer. In either case, the termination contemplated must, I think, mean termination according to law. Absent express language providing for it, I cannot conclude that the parties intended that an unlawful termination would trigger the end of the employee’s option rights. [emphasis added]

Why the word “termination” refers to a lawful termination while the phrase “ceases to be an employee” can be interpreted as referring to an unlawful termination without addition express language is difficult to reconcile.

Moreover, in Acuity, Justice Goudge did not address the apparent conflict of the court’s reasoning in Acuity with the British Columbia Court of Appeal’s decision in Saalfeld v. Absolute Software Corp., 2009 BCCA 18. In Saalfeld the court considered a wrongful dismissal appeal and the interpretation of a much stronger limitation clause in a stock option plan than that reviewed by the court in Acuity. The clause stated:

  • 1 In this Share Option Plan: …

 

The words “the last day on which the Officer or Employee worked for the Company or a Subsidiary of the Company” means, with respect to an Officer or Employee whose employment has been terminated by the Company or a Subsidiary of the Company

 

  1. other than for cause, either

 

  • the day specified by the Company … in writing to the Officer or Employee as being the last day on which the Officer of Employee is to work for the Company …; or

(B)  if such Officer or Employee is given pay in lieu of advance notice of a pending effective date of termination, the day on which such notice of termination is given in writing by the Company or such Subsidiary to the Officer or Employee;

The British Columbia Court of Appeal held that the limitation clause did not expressly provide the employer with the right to terminate the employment relationship without continuing the stock option agreement throughout the plaintiff’s reasonable notice period. The majority of the court, writing at paragraph 28, stated: “it cannot be presumed that the preamble in paragraph 1.1(z),an Officer or Employee whose employment has been terminated by the Company,’ contemplates those officers or employees unlawfully terminated” [emphasis added].

The majority of the court in Saalfeld also held at paragraph 42:

Had Ms. Saalfeld received the notice to which she was entitled, colloquially referred to as “working notice”, clause (A) of clause 1.1(z)(i.) would apply and Ms. Saalfeld would have had the opportunity to acquire shares. I do not consider clause (B) of 1.1(z) detracts from that proposition; had she received the working notice to which she was entitled, clause (B) would have been inapplicable.

It is difficult to reconcile Acuity with Saalfeld, Kieran and Veer. The panel of the court in Acuity took what appears to be an opposite view on the language required to limit a dismissed employee’s entitlement to damages when he or she has been wrongfully dismissed. The Supreme Court of Canada may be the only option to bring some sense of clarity to this issue. Given the current confusion in the law, employers who wish to prevent an employee entitlement to stock options during his or her reasonable notice period should ensure that they use strong and clear language to rebut the presumption of reasonable notice. Inserting a limitation clause with language similar to that interpreted by the court in Acuity may be insufficient if, at some point in the future, the current law of British Columbia becomes the law of Canada.