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Are Terminated Employees Entitled to Unvested Stock Options That Would Have Vested During the Notice Period?
Employment Law

Are Terminated Employees Entitled to Unvested Stock Options That Would Have Vested During the Notice Period?

The answer: Yes.

How did we get here? The answer lies in the Court of Appeal for Ontario’s evolving approach to this issue in recent years.

A terminated employee’s right to exercise stock options during the reasonable notice period has been an increasingly litigated issue that has been rife with uncertainty. Employers often take the position that the language used in these employee incentive agreements results in their cancellation on the date of termination. Unsurprisingly, employees assert entitlement to all non-discretionary remuneration that was a fundamental part of their compensation.

In 2004, the Court of Appeal for Ontario released a landmark decision named Kieran v. Ingram Micro Inc.[1] The Court denied the employee’s claim for stock option entitlements during the notice period because the employment agreement restricted these entitlements upon an employee’s termination “for any reason.” The Court concluded this language sufficiently encompassed the employee’s without cause termination.

Then, in 2016, the Court released its decision of Paquette v TeraGo[2]. The Court held that unless the language limiting the employee’s rights on termination expressly excluded payment of bonuses upon an employee’s termination without cause, employees would be entitled to these payments. Therefore, a term that requires “active employment” when the bonus is paid, without more, was insufficient to deprive an employee of a claim for compensation for the bonus he or she would have received during the notice period.

Since Paquette, to oust entitlement to bonus payments, Courts have invoked the need for a limiting clause that expressly cancels the employee’s entitlement to the remuneration in question upon dismissal without cause. However, confusion remained as to whether the Paquette decision also applied to stock option payments.

In late 2019, the Court decided O’Reilly v. IMAX Corporation[3], which helped to clarify an otherwise ambiguous legal patchwork of conflicting decisions. Larry O’Reilly worked for IMAX for 22 years, rising to the level of President. He was dismissed on January 4, 2016. After an unsuccessful severance negotiation, Mr. O’Reilly sued for wrongful dismissal and was awarded a 24 month reasonable notice period including all commissions outstanding, the pension contributions that would have been made during that period, and the value of benefits lost during the notice period. Mr. O’Reilly also claimed damages for the lost opportunity to exercise options that would have vested during the reasonable notice period. IMAX appealed this last head of damages.

The relevant stock option plan provided for the following:

  1. Termination of Employment, Consulting Agreement or Term of Office

(a) In the event that a Participant’s employment, consulting arrangement or term of office with the Company or one of its Subsidiaries terminates for any reason, unless the Board or the Committee determines otherwise, any Options which have not become Vested Options shall terminate and be cancelled without any consideration being paid therefor.

In upholding the trial judge’s decision, the Court held that the stock option payments were an integral part of the respondent’s employment, and that they would have vested had his employment not been wrongfully terminated. Further, the Court held that the reference to “terminates for any reason” in the plan could not be presumed to include termination without cause. Accordingly, the plan’s wording failed to clearly and expressly eliminate Mr. O’Reilly’s common law right to claim for all non-discretionary remuneration that formed a fundamental part of his compensation. In light of the above jurisprudence, it appears settled in Ontario now, that the rule articulated in Paquette applies to unvested stock options that vest during the reasonable notice period.

 

[1] 2004 CanLII 4852

[2] 2016 ONCA 618

[3] 2019 ONCA 991

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