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In the Courts: Are Stock Plan Provisions Too General?

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January 23, 2020 | Jennifer Namazi

In the Courts: Are Stock Plan Provisions Too General?

A recent case in the Canadian courts raises some questions about whether stock plan provisions need to be more specific.

Before I jump in to the nuances of this case, I want to share a perspective I’ve developed after following many court cases involving company stock plan benefits. It seems to me that time after time, courts are increasingly looking for the details over general statements. When something is too open to interpretation, or not so clearly defined, a court must figure out how to fill in the gaps (or not). This is a responsibility I don’t envy. I honestly can’t imagine being in the seat of a magistrate who is trying to determine if stock plan terms were clearly defined, communicated and followed.

Back to the Canadian case, we find an example of how sometimes stock plan provisions don’t stand up in court. Or, at least are interpreted to be too general.

The case involves Canadian company IMAX Corp. and a former executive, Larry O’Reilly. Mr. O’Reilly was terminated from his executive position with the company. After unsuccessful attempts to negotiate a severance package – including a “notice period” which is typical in Canada, the company moved forward on its own and set a date for O’Reilly’s termination to be effective – advising 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 subsequently sued for wrongful dismissal. He won that case and was awarded 24 months of compensation, including that from stock options and restricted stock units that would have vested during that time.

On appeal, IMAX did what I’m guessing many employers would do – they referred to and relied upon the language in their stock plans (Restricted Share Units plan and Stock Option Plan, both of which had the same termination provisions). The plans 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.’” (Excerpt from Benefits Canada article “Ontario appeal court rules former IMAX exec may exercise stock options in reasonable period” (Julius Melnitzer, January 21, 2020)

The key learning from this case comes from the appellate court’s decision, in which Melnitzer describes the following “…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.”

It was noted that this was the fifth such decision from the Ontario Court of Appeals on this topic 2019. Melnitzer’s article highlights that “’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.’”

Upon digesting the result of this case, my thoughts go to the following:
  • The plans referenced in the IMAX case had termination provisions quite similar to what we are familiar with here in the U.S. Yet, the court found that language too general – noting that that what constitutes an actual termination of employment is not defined. This sure raises the question as to whether other courts would have a similar interpretation if such a provision is challenged.

  • This isn’t the first I’ve heard of plan language being referenced by a court as too general. In cases of divorce, common transfer language in stock plans (prohibiting transfers, for example) may not be enough to convince a court that no transfer should be allowed. It’s possible the courts may view such a transfer as “involuntary” due to the circumstance as divorce, and therefore something the court can’t enforce as a prohibited action – even if the plan says it’s prohibited. Thanks to panelists Derek Windham (Hewlett Packard Enterprise), Josh Schaeffer (Equity Methods), Justin Ho (Orrick Herrington & Sutcliffe LLP), and Raenelle James (Equity Methods) on the session “Divorce, Death and the Impact on Equity Awards”) at our 27th Annual NASPP Conference for this particular insight.

  • Much of our standard stock plan language has been around for years, if not decades. It’s time to consider which provisions could benefit from more detailed definition.

If we think about the purpose of a stock plan and associated agreements, it’s to define the terms and conditions that govern the company’s issuance and administration of stock compensation and also the specific rules that will apply to participants under the plan. If the goal is to set forth clear, unambiguous terms, then we should take learning from the courts and identify opportunities to more clearly define provisions within the plan.

-Jennifer
 

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