Can Stock Options Be Exercised After Termination?
By Melynda Layton LLB
As Published in February 23rd, 2001 Issue of
The Lawyers Weekly
Stock options, as part of a comprehensive compensation package, are often a lucrative and valuable employee benefit. As a result, litigation regarding employees’ rights to stock options following termination of employment has increased.
While Courts have traditionally applied a restrictive model limiting an employee’s entitlement to those options accrued as of the date of receipt of notice of termination, in recent years jurists have demonstrated a more liberal approach to a terminated employee’s entitlement following their last day of “work.”
A recent decision of the Ontario Court of Appeal, Gryba v. Moneata Porcupine Mines Limited 2000 ONT. C.A. LEXIS 796, addressed this issue. OnJune 20, 1995, Mr. Gryba was terminated as a means of reducing high administrative costs. He was offered a severance package which he refused. He subsequently received $12,295.00 in lieu of notice in satisfaction of his statutory entitlements.
At the time of termination of his employment, Mr. Gryba earned $84,000.00 per annum and was entitled to a benefit package valued at 30% of his salary.
Mr. Gryba had also accrued 260,000 vested stock options. Mr. Gryba did not exercise his stock options during the thirty (30) days following receipt of his “notice of termination.”
The Plaintiff claimed, had he been permitted to do so, he would have exercised his options commencing January 1996. Mr. Gryba alleged the Stock Option Plan, literally interpreted, permitted the exercise of options during the reasonable notice period.
The relevant provision of option agreement was as follows:
If an optionee ceases to be employed by the corporation otherwise then by reason of death or termination for cause . . . any option of unexercised portion thereof held by such optionee at the effective date thereof may be exercised in whole or in part for a period of thirty (30) days thereafter.
At trial Justice Swinton decided Mr. Gryba was entitled to $62,400.00 for loss of stock options. The court found the 30-day option period commenced at the end of the common law notice period, instead of upon receipt of notice of termination.
On appeal, Moneata argued the stock option agreement clearly established employees’ had no further entitlement to options following termination of employment. The company argued that termination from employment occurred upon receipt of “notification of dismissal.”
The court of appeal disagreed, saying that the reference to “effective date of termination” allowed the Plaintiff to exercise his options during the notice period and for the 30-day period following thereafter.
In reaching this determination, the court of appeal distinguished the earlier decision, Brock v. Mathews Group Limited (1991), 34 C.C.E.L. 50 (Ontario Court of Appeal), indicating the stock option plan in Brock limited the plaintiff’s entitlement during the reasonable notice period by its historical reference to stock options ceasing upon fifteen (15) days from the date of ‘notice of dismissal.’
Although the stock option plan, in place at the time of termination, did not reference ‘notice of dismissal.’ previous versions of the plan were instrumental when interpreting Mr. Brock’s right to exercise his options following the termination of his employment.
Moneata furthermore alleged Mr. Gryba was not entitled to damages as a result of his failure to satisfy the condition precedent of the stock option agreement requiring he demonstrate his intention to exercise his stock options by delivering funds to the employer 15 days prior to the options’ expiration.
The majority of the court of appeal disagreed with the defendant’s position finding it was sufficient that Mr. Gryba orally advised the defendant of his intention to exercise his options. Given the plaintiffs’ economic position, he would suffer undue hardship if he was required to go through the facade of exchanging money for the options.
A similar argument was made by the Defendant in Poplack v. Intermetco Ltd. [1999] O.J. No. 555 (OC G.D.) where the employer alleged that. Poplack failed to ‘mitigate his damages’ by purchasing stock options at market value following his termination of employment.
Poplack was promoted to the position of president of Intermetco Ltd. In conjunction with his employment, he signed an employment agreement and a share option plan, providing, in part:
You have been given the entitlements of the company group benefits in discussion with Doris Mair and John Lychy. Entitlement to participate, including the pension plan . . .
In the event your employment is terminated by Intermetco Limited or any successor entity, before completion of two years employment, and that termination is not for cause, you shall be entitled to receive one year’s salary at the current rate; thereafter, the entitlement would be 18 months. Benefits and auto allowance would continue for a like period ...
The Court found, despite the ambiguity of the employment agreement, the principle of contra preferente required that benefits be given a broad definition to include stock options.
On the issue of mitigation, Justice Frank Roberts found that. Poplack was not precluded from damages because of his failure to purchase shares at market value. The court noted such a requirement would be unduly restrictive.
A proper, carefully worded stock option plan will limit an employee’s right to exercise stock options following termination of employment. Absent such language the presumption is the right to exercise the share option survives during the notice period.
Recent jurisprudence establishes courts are reluctant to impose an obligation on a former employee to demonstrate an intention to exercise the option.
The Ontario Court of Appeal has made it clear that terminations of employment that result in the denial of the right to exercise stock options will be the anomaly.
An employer wishing to minimize its liability upon termination of employment must ensure the stock option plan contains specific language limiting the optionee’s entitlement.
To ask a question or for further advice please contact Melynda at melynda.layton@careerlaw.ca or by telephone at 613-225-4400
