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The quick answer: it depends on what your contract or stock option plan states during the reasonable notice period (after termination).

What are stock options?

Stock options are a form of equity compensation given to employees who purchase stock in the employer’s corporation at a particular price set some time in the future. Stock options are generally a right to be vested to the employee, rather than an employer obligation. Stock options are not actual shares of stock but are the exercisable rights to buy a set number of shares at a flexible price. Therefore, if the value of the stock goes up, the employee could make money on the difference.

These options are often outlined in a stock option plan, which may address what employees’ options are if they are let go. Often, these plans will outline what should occur if the dismissal was with cause or without cause, in the form of vested or unvested options.

Dos and Don’ts of a Stock Option Policy

The timing of when employees get to exercise their options after dismissal has been extensively litigated. Companies can draft their policies to specifically limit their employees’ entitlements during the reasonable notice period. For example, employers can limit an employees’ right to exercise their stock options, so long as these limits do not try to circumvent the Employment Standards Act requirements, such as the continuation of stock options during the statutory notice period. To effectively limit a terminated employee’s stock option entitlements, the plan or contract must be unequivocal, and the limits must be brought to the employee’s attention upon hire. The plan must also be sufficiently clear and unambiguous to limit the employees right to exercise their stock options during the reasonable notice period.

The Supreme Court of Canada’s test in Mathews v Ocean Nutrition Canada deals with the loss of stock options and other bonuses during the reasonable notice period. It is:

  1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period but for their termination? And if so,
  2. Do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

The onus does not just rest on the employer to draft an appropriate plan or contract limiting the employee’s entitlement. Rather, the employee must also take steps to educate themselves what their applicable policies or contracts state. In Battiston v Microsoft Canada Inc., the Ontario Court of Appeal ruled that an employee cannot choose to not read the policy and then assume the position that they knew nothing of the document limiting their stock option rights after termination.

Key Takeaways

Stock option plans must expressly state their limitations and entitlements post termination, and the employer must clearly inform the employee of the plans. Not doing so could result in costly litigation. Conversely, employees should legal advice both prior to entering into any equity agreement, and upon termination to properly understand their rights and entitlements to equity compensation.

Nelligan Law is grateful for the contribution  of Sophie Ryder, Articling Student, in writing this blog post.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2021 Nelligan O’Brien Payne LLP.

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