Court: Contract Term Withholding Stock Vesting Rights Unfair

Written on behalf of Peter McSherry

Many companies offer to their employees stock option benefits which are often a valuable form of compensation. These option plans are often complicated, however. The traditional plan offers the employee the right to buy the shares of the company at a pre-determined price, typically the closing price of the stock on the day prior to the grant. The employee can then purchase these shares over a fixed number of years at this “strike” price.

For example, if 4,000 shares are made available, the employee is allowed to buy these shares over 4 years at 1,000 per calendar year from the date of the grant. This ability, but not mandatory obligation, to buy the shares is called “vesting”, which means the employee has now the legal right to buy the shares. The employee may wait and exercise the option to buy the shares upon the expiry of the four year option period, usually extended by 6 months for this purpose. The hope is that the share value has risen over the life time of the option grant.

Limiting Term

Often the employer may attempt to deny the employee the right to enjoy the benefit of the future vesting period at the time of termination through a term in the employment contract. For example, the contract may state that on termination (whether for cause or not), the employee has no entitlement to the passing of time which would result in unvested shares becoming vested.

In this example, the employee may have 6 months to wait for the next 1,000 shares to “vest” at the date of termination. This type of contract term may deny the employee this right.

Ironically, if the company is wrong about this assertion, it is the company’s legal obligation to pay the financial loss, as opposed to the open market where the options would have normally been sold. There are also tax implications for a “gross-up” of the financial loss but that is another issue altogether.

Recent Decision

A new Ontario Superior Court decision considered such a term. The basic rule of interpretation of all similar terms is that if the issue involves compensation which is an integral part of the employee’s compensation, they should be entitled to the common law presumption of fair notice.

The wording of the document in this case stated as follows:

“… Awardee’s Continuous Status as a Participant will be considered terminated as of the date Awardee no longer is actively providing services to the Company or a Subsidiary (regardless of the reason for such termination and whether or not later to be found invalid or in breach of employment laws in the jurisdiction where Awardee is employed by the terms of Awardee’s employment agreement, if any), …” 

In this case, the judge found that the agreement clearly determined that the employee’s rights to vesting did end legally on the termination date by these words. Often the court will look at this type of paragraph to see if it is ambiguous, that is capable of differing interpretations, which is a death call for the agreement, if so, as any ambiguity is generally read against the employer which drafted the contract. This was not the finding in this case.

Unambiguous, but Unfair

The Court nonetheless found that the contract term was unenforceable.

The Court determined that the terms of the agreement were particularly unfair and that such terms must be clearly brought to the attention of the employee:

I find that the termination provisions found in the Stock Award Agreements were harsh and oppressive as they precluded Battiston’s right to have unvested stock awards vest if he had been terminated without cause.  I also accept Battiston’s evidence that he was unaware of these termination provisions and that these provisions were not brought to his attention by Microsoft.  Microsoft’s email communication that accompanied the notice of the stock award each year does not amount to reasonable measures to draw the termination provisions to Battiston’s attention.  Accordingly, the termination provisions in the Stock Award Agreements cannot be enforced against Battiston.  Battiston is entitled to damages in lieu of the 1,057 shares awarded that remain unvested.

This reasoning is similar to, but different from, the argument that there must be “consideration” or something of value given to support the alleged contract. The plaintiff’s case was successful.

This is yet another example of the principle that the words on the page may not mean what they appear to be saying at first glance. This is reflective of the need to get legal advice before you sign away your rights.

Get Informed, Stay Current

The law is a dynamic and odd creature. Employees should strive to stay informed and be prepared. We will update the all news as it develops in this space. Contact the offices of Guelph employment lawyer Peter McSherry. We can guide you through the issues, help you understand your rights, and defend your position with respect to employment contract terms including non-compete clauses. Contact us online or by phone at 519-821-5465 to schedule a consultation.