The right to exercise pre-existing stock options is often a point of contention between a dismissed employee and the former employer. Veer v. Dover Corp1., a recent decision of the Ontario Court of Appeal, is an instructive case for those wishing to avoid costly, post- dismissal litigation aimed at resolving this issue.
Victor Veer was dismissed from Dover Corp. in 1993 after over forty years of service. At trial it was found that this dismissal was not for cause, and Madam Justice Lax awarded Mr. Veer damages equivalent to 24 months’ notice. Further, Madam Justice Lax decided that Mr. Veer should still have been allowed to exercise his stock options during this 24-month notice period, and she awarded him damages to compensate for this loss.
Dover Corp. appealed based on, among other things, its position that Mr. Veer’s stock option agreement specifically cancelled any stock option benefits if he were dismissed. The relevant portion of the agreement read:
If the option holder’s employment with the corporation … is terminated for any reason … whether such termination be voluntary or involuntary, without his having 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.
Madam Justice Lax had read into the agreement a requirement that the dismissal be “lawful”, though the agreement itself did not say this.
On appeal, Dover Corp. argued that Madam Justice Lax had erred in determining that the value of the lost stock options should be calculated as at the date of the judgment, instead of the date when the notice period would have expired. Dover Corp. suggested that at the end of the notice period Mr. Veer should have mitigated his loss by purchasing with his own funds the shares that he would have been entitled to under the agreement. The Court of Appeal dismissed this argument on the grounds that it had not been raised at trial. The Court also noted that purchasing the shares would have cost Mr. Veer between $261,000 and $303,000, and thus was not a reasonable means of limiting his losses.
Speaking for a unanimous Court, Mr. Justice Goudge also upheld Madam Justice Lax’s decision with regard to her determination that the stock option agreement applied only to lawful dismissals. He noted “… the termination contemplated must, I think, mean termination according to law.” He continued “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. … 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 agreement in these stock option agreements.”
The Court distinguished the Veer case from a previous Ontario Court of Appeal decision, Brock v. Matheson Group Limited2, solely on the wording of the stock option agreement. In Brock, the agreement had stipulated:
“In the event of an employee ceasing to be an employee or servant of the Corporation … the option hereby granted shall forthwith cease and terminate and shall be of no further force or effect whatsoever … provided … the Employee shall have 15 days from the date notice of dismissal is given in which to exercise the option.”
In that case, the Court had found that the agreement was sufficiently precise to determine that the date of notice of termination was the date that mattered, whether the termination was lawful or not. The Veer decision does not dispute that an agreement can allow for an unlawful dismissal; it simply found that the particular agreement was not clear on this point and therefore the Court would assume that a lawful termination was required.
How will this case affect future dismissal cases in which the exercising of stock options is at issue? Essentially, Veer stands for the proposition that if a provision in a stock option agreement extinguishes an employee’s benefit upon dismissal, it will be assumed that this dismissal must be lawful absent clear language to the contrary. Veer does not say that a dismissal must always be lawful to cancel benefits under an agreement. In fact, it strongly suggests that a properly worded agreement that was clear on this point would be acceptable.
Veer is the latest in a series of cases which points to the importance of carefully worded stock option agreements. In both McDonald v. Lac Minerals3 and Ryan v. Laidlaw Transportation4, the courts came to a similar decision through similar reasoning. The tendency seems to be to give the employee the benefit of the doubt with regard to exercising stock options after dismissal, unless the agreement is very clear that this is not allowed. The Veer decision adds to this jurisprudence by reading in a lawful termination provision where the agreement is silent on the issue.
The Veer decision has since been cited a number of times with similar results. In Iocobucci v. WIC Radio Ltd.5, the only issue was the plaintiff’s entitlement to damages for lost stock options after wrongful dismissal. The plaintiff’s employment was terminated on May 31, 1997, and he was placed on salary and benefit continuation until November 30, 1998. In April 1998, the defendant employer accelerated the right of all employees to purchase the entire balance of their share options not yet exercised. The plaintiff was not informed of this development, and therefore did not purchase 7,150 shares that would have been available to him. The British Columbia Supreme Court found for the plaintiff. Justice Loo cited Veer (at this time still the trial level decision) as authority for the proposition that “a stock option agreement which terminates the options upon termination of employment, is to be read as meaning at the end of the notice period.”
As a practical matter, employees should be aware that properly worded stock option agreements may be available to cancel their benefits upon dismissal, even if that dismissal is unlawful. Employers should be advised that unless the agreement specifically contemplates an unlawful dismissal, or clearly cites the date of notice of dismissal as the date of termination of benefits (as in Brock), the courts will assume that the agreement refers only to a lawful dismissal on notice, whether that notice be under contract or at common law. Veer indicates that the courts will be willing to uphold an otherwise valid stock option agreement to the contrary. However, the contract will have to be very precise in its terms.
Employers and employees should therefore understand that notwithstanding language like that used in the Veer stock option agreement, the employee may well be entitled to continued vesting of stock options during the notice period or damages in lieu.
1(1999), 120 O.A.C. 394
2(1991), 34 C.C.E.L. 50 (Ont. C.A.)
3 O.J. No. 1216 (H.C.) (Quicklaw)
4(1995), 26 O.R. (3d) 97 (Ont. C.A.)
5 B.C.J. No. 2101 (British Columbia Supreme Court) (Quicklaw).