Julius Melnitzer | January 21, 2020
The Ontario Court of Appeal has ruled that a wrongfully dismissed employee could take advantage of the stock options and restricted share units that vested during the reasonable notice period, despite language in the governing plans that cancelled unvested units on termination.
The case, between IMAX Corp. and a former executive named Larry O’Reilly, represented at least the fifth decision from the appeal court on the topic in 2019.
“A wrongfully dismissed employee’s right to take advantage of stock options or other benefits during the reasonable notice period remains the subject of increasingly frequent litigation,” says Waheeda Ekhlas Smith, a partner at Toronto-based Pak Smith LLP. “I believe that will continue until lawyers start incorporating more specific provisions ousting employee’s rights in the language of stock option, bonus and incentive plans.”
O’Reilly worked for IMAX for 22 years. When he was dismissed as president of institutional and strategic sales and executive vice-president of sales, his compensation included participation in a long-term incentive plan, which included restricted share units and a stock option plan.
After unsuccessful attempts to negotiate a severance package, the company set an effective date for O’Reilly’s termination and advised him that any restricted share units or stock options that hadn’t vested as of 30 days from his last day of work would be cancelled.
O’Reilly sued for wrongful dismissal and was awarded 24 months of compensation.
Justice Mario Faieta of the Superior Court of Justice ruled that O’Reilly’s damages for loss of the stock options and restricted share units 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 O’Reilly had exercised his options in the past and therefore would likely have done so during the reasonable notice period.
IMAX appealed with the company relying on the language of the plans. The restricted share units plan, which mirrored the stock option plan, stated that if an employee’s employment terminates for any reason other than for cause, disability or death, the units “shall cease to vest” and any unvested units were to be “cancelled immediately without consideration as of the date of such termination.”
But as the Court of Appeal saw it, the flaw in IMAX’s argument was the plans did “not establish, in unambiguous terms, when the date of termination is or when employment terminates.” The upshot was that the ambiguity allowed for the possibility that termination didn’t occur until the end of the reasonable notice period. Accordingly, the language of the plans didn’t clearly oust O’Reilly’s right to damages for losses occurring during that time.
“Generally speaking, ambiguities in documents drafted by employers are resolved in favour of employees, the less sophisticated parties,” says Smith. “Equity and incentive plans will be held to a high standard of precision and should clearly define when entitlement terminates under the plan, what happens to both vested and unvested units and set clear deadlines for the exercise of vested options.”