Saturday, 1 February 2020

"It ain't over till it's over." - Yoga Berra's Profound Answer to Employment Law's Vexing Question

"It ain't over till it's over." According to a very quick Google search, the very height of what passes for research in 2020, Yogi Berra first uttered the phrase about baseball's 1973 National League pennant race.

While he almost assuredly never intended to do so, Berra has provided the quintessential answer to one of employment law’s most vexing questions – as it applies to stock option plans, when does an employee’s employment terminate?

In O'Reilly v. IMAX Corporation, 2019 ONCA 991 (CanLII), a decision authored by the Chief Justice of Ontario, the Honourable George R. Strathy concerning the interpretation and application of an employee stock option plan, Ontario’s top court held that the words “when employment terminates”, did not establish, in unambiguous terms, when the date of termination was nor when employment terminated. Applying the rule of contractual interpretation established by the Court of Appeal in the case of Gryba, (i.e. in the absence of unambiguous terms to the contrary, the terms of a contract should be presumed to refer to lawful termination rather than unlawful termination ) the court held that, when it comes to employment, it ain't over till it's over.

Commentary

If one has found the interpretation of contractual termination clauses to be an exercise in parsing words, then one is truly in for a treat when it comes to interpreting equity plans, such as stock option plans.

The problem in the O’Reilly case is highlighted at paragraph 52 of the court’s reasons for decision, where Chief Justice Strathy notes, “While 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.” By comparison, language that has been held to be clearer with respect to when an employee’s entitlement terminates has included the phrase “ceases to perform services for”.

What the court strains to say in its decision in O'Reilly is: When drafting an equity plan, if you wish to avoid the vesting of equity awards during the common law notice period, then both: (a) say so, and (b) be absolutely crystal clear about when the entitlement terminates. A further, much more subtle message should be to not wrongfully dismiss your employees in the first place, but one digresses.

Facts

In this case, the employer, IMAX, contended that the terms of the employee’s stock options and restricted share units (“RSUs”) prevented them from vesting after the date he was dismissed without cause. The motion judge, Justice Mario D. Faieta of the Superior Court of Justice rejected this submission, finding that the options and share units continued to vest during the reasonable notice period and that the employee was entitled to damages for the loss of the opportunity to exercise them.

Because the language at issue is important, here are the relevant portions of the contracts.

RSUs under the LTIP

This Agreement sets forth the general terms and conditions of Restricted Share Units (“RSUs”). By accepting the RSUs, the Participant agrees to the terms and conditions set forth in this Agreement and the IMAX 2013 Long Term Incentive Plan (the “IMAX LTIP”). …

4. Termination of Employment Generally. In the event that the Participant’s employment with the Company terminates for any reason other than death, Disability or for Cause, the RSUs shall cease to vest and any unvested RSUs shall be cancelled immediately without consideration as of the date of such termination. Any vested RSUs shall continue to be settled on the applicable Settlement Date.

5. Death; Disability. If the Participant’s employment with the Company terminates as a result of the Participant’s death or Disability, a portion of the RSUs shall vest such that, when combined with previously vested RSUs, an aggregate of 50% of the RSUs granted pursuant to the Agreement shall have vested. Any vested RSUs shall be settled on the applicable Settlement Date and any unvested RSUs shall be cancelled immediately without consideration as of the date of termination.

6. Termination for Cause. If the Participant’s employment with the Company terminates for Cause, any outstanding RSUs, whether or not vested, shall be cancelled immediately without consideration as of the date of termination, and the Participant shall have no further right or interest therein.

Stock Option Grants under the LTIP

This Agreement sets forth the general terms and conditions of Options. By accepting the Options, the Participant agrees to the terms and conditions set forth in this Agreement and the IMAX Corporation Long-Term Incentive Plan (the “IMAX LTIP”). …

(5) Termination of Employment Generally. In the event that the Participant’s employment with the Company terminates for any reason other than death, Disability or for Cause, the Options shall cease to vest, any unvested Options shall immediately be cancelled and revert back to the Company for no consideration and the Participant shall have no further right or interest therein. Any vested Options shall continue to be exercisable for a period of thirty (30) days following the date of such termination; … To the extent that any vested Options are not exercised within such period following termination of employment, such Options shall be cancelled and revert back to the Company for no consideration and the Participant shall have no further right or interest therein.

Stock Option Grants under the Stock Option Plan

7. 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.

Decision of the Ontario Superior Court

On the motion for summary judgment, Justice Faieta held that the respondent employee’s 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. He noted that the respondent had exercised his options in the past and that he therefore would likely have done so in this case, had his employment not been terminated.

Justice Faieta found that the language of the relevant awards was not sufficient to cancel the respondent’s entitlement to exercise the awards or to remove his entitlement to damages for their loss. Justice Faieta’s decision was that the respondent was therefore entitled to damages for the loss of the right to exercise the RSUs and stock options that would have vested during the reasonable notice period.

The employer appealed Justice Faieta’s decision on this point.

Decision

Writing on behalf of the court, Strathy C.J.O. wrote the following:

[22] The principle underlying an award of damages for wrongful dismissal “is that the terminated employee is entitled to compensation for all losses arising from the employer’s breach of contract in failing to give proper notice”: Paquette v. TeraGo Networks Inc., 2016 ONCA 618, 352 O.A.C. 1, at para. 16. The purpose of damages is to place the employee in the same financial position they would have been in had such notice been given: Sylvester v. British Columbia, 1997 CanLII 353 (SCC), [1997] 2 S.C.R. 315, at para. 1. The goal, in other words, is to make the employee whole again.

[23] It has long been established that a wrongfully terminated employee is entitled to compensation for the loss of contractual benefits that they would have earned during the reasonable notice period, including the loss of pension benefits, bonuses, stock options, or other incentives: Taggart v. Canada Life Assurance Co., 2006 C.L.L.C 210-007 (Ont. C.A.) (pension benefits); Paquette (bonuses); Kieran (stock options); Veer v. Dover Corporation (Canada) Ltd. (1999), 1999 CanLII 3008 (ON CA), 120 O.A.C. 394 (stock options); and Gryba v. Moneta Porcupine Mines Ltd. (2000), 2000 CanLII 16997 (ON CA), 139 O.A.C. 40, leave to appeal refused, [2001] S.C.C.A. No. 92 (stock options).

[24] In this court’s decision in Taggart, Sharpe J.A. articulated the approach to be taken by courts in determining an employee’s claim. At para. 12 of his decision, he stated: In my opinion, the proper way to analyze the respondent’s claim is to consider:

  1. his common law right to damages for breach of contract, and
  2. whether the terms of the [contract] alter or remove a common law right.

[25] With regards to the first inquiry, the employee will have a common law right to damages where they would have earned a benefit but for the employer’s breach of contract: Taggart, at para. 20. This will generally be the case where the benefit can be described as an “integral part” of the terminated employee’s compensation: Paquette, at paras. 17, 30; Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619, 402 D.L.R. (4th) 325, at para. 86.

[26] If a common law right is established, “the question at this stage is whether there is something in the language of the [contract] between the parties that takes away or limits that common law right”: Taggart, at para. 20. In the context of a stock option plan, therefore, the question is whether there is language in the plan that specifically removes the employee’s common law entitlement. As noted by van Rensburg J.A. in Paquette, however, “[t]he question is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights”: at para. 31. In undertaking this analysis, the proper focus is on the wording of the particular plan: Kieran, at para. 58, citing Brock v. Matthews Group Ltd. (1991), 43 O.A.C. 369, at para. 22.

[27] A number of decisions of this court have applied these general principles in the context of stock option plans. For instance, in Brock, the court held that an employee was not entitled to exercise his options up to the expiration of the period of reasonable notice because the relevant plans established that, regardless of the mode of termination, his right was extinguished on his “ceasing to be an employee” and that any options had to be exercised “15 days from the date notice of dismissal is given”: at paras. 14, 16, 22-23. The language thus unambiguously removed the common law right.

[28] In contrast, in Veer, Goudge J.A. held that an employee was entitled to exercise his stock options up to the end of the notice period because, unlike in Brock, the language of the plan did not expressly extinguish his rights on wrongful dismissal. The relevant contractual language was as follows:

If the option holder’s employment with the corporation … is terminated for any reason other than set forth in paragraphs 6, 7 or 8 above [death, retirement or incapacity], 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.

[29] Goudge J.A. rejected the appellant’s argument that the inclusion of the reference to involuntary termination (i.e., termination initiated by the employer), necessarily included wrongful termination without notice. He observed, at para. 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. The agreement should not be presumed to have provided for unlawful triggering events. Rather, the parties must be taken to have intended that the triggering actions would comply with the law in the absence of clear language to the contrary. There is no such language in these stock option agreements.

To the above a footnote is added, which reads, “The emphasized language has been referred to as a rule of contractual interpretation in the context of a stock option agreement. The rule holds that, in the absence of unambiguous terms to the contrary, the terms of a contract should be presumed to refer to lawful termination rather than unlawful termination: Finlayson J.A., dissenting, in Gryba, at para. 22.”

[30] Similarly, in Gryba, the majority of the court held that, while, as in Brock, the plan spoke of the optionee “ceasing to be employed”, it also established that the “date for the exercise of stock options is 30 days following the effective date of termination”. The majority found that the effective date “would include the notice period” and therefore the employee was entitled to claim damages: at para. 51 (emphasis in original). For the majority, the plan was distinct from the one at issue in Brock, where the right was to be extinguished regardless of whether the mode of termination was lawful or unlawful:

The wording of the stock option plan in this case can be read as contemplating a lawful notice of termination and the effective date of the cessation of employment is the end of the notice period. Our interpretation is supported by the fact that the stock option clause also provides that in the event of death or dismissal for cause the employee has no right to exercise stock options: at para. 51.

To that quotation a further footnote is appended, which reads, “In dissent, Finlayson J.A., referring to the similar language in Brock, found that the effective date of termination was the date on which Mr. Gryba was dismissed without cause. He would have denied the employee any damages for losses after the 30 day period following his dismissal: at para. 24.”

[31] Finally, while Paquette dealt with the right to receive bonuses, not stock options, van Rensburg J.A. reviewed a series of stock option cases, including Kieran, Gryba, Veer, and Brock. She noted that the timing of the exercise of an option is key to its value to an employee and that the cases have required clear language to limit the right to exercise options on termination. Language such as “termination” or “cessation” of employment has been insufficient to prevent the exercise of an option during the wrongful dismissal period: at paras. 40-41. She suggested that the approach in these cases can be summed up by the language of Goudge J.A. in Veer: “the parties must be taken to have intended that the triggering actions [for the cancellation of an employee’s stock option rights] would comply with the law in the absence of clear language to the contrary”: Paquette, at para. 42, citing to Veer, at para. 14.

[32] A useful summary of the principles set out in Taggart, Lin, and Paquette is provided in Manastersky, at paras. 39-43. At the risk of paraphrasing Brown J.A., in light of the foregoing analysis, I would further summarize as follows:

  1. A wrongfully dismissed employee is entitled to damages for the loss of wages, salary and other benefits, that would have been earned during the reasonable notice period.
  2. This principle applies to bonuses, stock options, or incentives that are an integral part of the employee’s compensation, as well as pension benefits that would have accrued or been earned during the reasonable notice period.
  3. In considering whether the loss of such benefits is recoverable, the court undertakes a two-step analysis.
  4. The first step requires a determination of the employee’s common law right to damages for breach of contract, bearing in mind that the measure of damages is the amount to which the employee would have been entitled had the employer performed the contract.
  5. The second step requires the court to determine whether the terms of the relevant contract or plan unambiguously alter or remove the employee's common law rights, having regard to the presumption that the parties intended to apply the law, in the absence of clear language to the contrary.

[44] … In examining the specific language of the three stock option plans [in Kieran], Lang J.A. made three key observations.

[45] First, the plans unambiguously stated that Mr. Kieran’s right to exercise his stock options would expire if his employment was terminated for “any reason” other than death, disability, retirement (or cause, in the case of the Rollover Plan): at paras. 59-60.

[46] Second, the Restricted and Equity plans “specifically provided that Mr. Kieran’s employment 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”: at para. 59.

[47] And third, the Rollover Plan provided that the “employer could dismiss the employee at any time ‘free from any liability or any claim under the Plan or otherwise, unless otherwise expressly provided in the Plan or in any Option Agreement’”: at para. 51. The plan provided that if an employee was terminated by reason of death, disability, or retirement, they would have one year to exercise their options, post employment: at para. 50. It did not make any express statements regarding avenues of claim for employees in the event they were terminated by wrongful dismissal.

[48] In light of these observations, Lang J.A. found that all three plans excluded a claim for shares or options that vested during the reasonable notice period. An examination of all three plans demonstrated that the relevant provisions had two features, expressed in one way in the Restricted Plan and the Equity Plan and another way in the Rollover Plan. First, each plan established that an employee terminated without cause would have no entitlement to exercise any option rights and, second, each plan determined when that would occur. The Restricted Plan and the Equity Plan established that termination would occur on the date the employee ceased to perform services whether or not he or she continued to receive salary in lieu of notice. These provisions clearly and unambiguously took away the employee’s common law rights. The Rollover Plan, while using different language, removed the right to exercise the stock option on “termination”, and went on to provide, in the general conditions, that the employer could dismiss the employee at any time, “free from any liability or any claim under the Plan or otherwise.” While “termination”, without more, refers to lawful termination, the additional language of the general conditions was sufficient to expressly remove that presumption.

[49] But for the additional language in all three plans, the words “terminate” or “termination”, would have been ambiguous. They could refer to the date notice was given or to the end of the reasonable notice period. In light of that ambiguity, they would have been interpreted as requiring the latter, namely, “termination according to law” at the end of the reasonable notice period. However, the ambiguity was removed by the additional language and, with it, so was the employee’s common law right.

[50] Mr. Kieran was thus bound by the “plain language” of the plans, his right to exercise the options was not extended by the period of reasonable notice, and he was not entitled to damages for the loss of the options.

[51] The appellant contends that the language of the Rollover Plan in Kieran is substantially the same as the language of the plans in this case. Consequently, the respondent’s awards should be found to have ceased to vest on the effective date of his termination.

[52] I would not give effect to that argument. While 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. In other words, they leave open the possibility that termination could have occurred at the end of the reasonable notice period. And, as expressed above, where such ambiguity exists, the language will be interpreted as mandating a lawful termination.

[53] While the appellant is correct to note that the language of the IMAX plans and the Rollover Plan in Kieran are similar, he overlooks the fact that, in Kieran, additional language was used to remove any entitlement to damages. There was no such language in this case.

[54] I would therefore reject the appellant’s argument that we are bound by Kieran. In light of this conclusion, the next step is to determine whether the motion judge correctly applied the governing principles and arrived at the correct conclusion.

[55] The motion judge identified and expressly applied the principles set out above, referring to, among others, Veer, Taggart, and Paquette. He found as a fact that the awards were an integral part of the respondent’s employment, that they would have vested had his employment not been wrongfully terminated, and that he would have exercised the awards, as he had done in the past. This was the first step in the Taggart/Paquette analysis.

[56] In the application of the second step, the motion judge, referring to Veer, found that the reference to “terminates for any reason” in the plans could not be presumed to refer to termination without cause. Further, he found that the phrase “cancelled immediately without consideration” was not “a clear, express provision that remove[d] the common law right of an employee, terminated without cause, to claim damages in respect of lost unvested RSUs”: at para. 64.

[57] The motion judge applied the correct legal principles and arrived at the correct conclusion. As I have explained in the discussion of Kieran, above, in the absence of unambiguous contractual language, as there was in Kieran, the awards continued to vest during the reasonable notice period. The respondent was entitled to damages for the loss of his entitlement to exercise his rights.

Justice Strathy therefore dismissed the employer’s appeal. Costs were to be determined later.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

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