On July 9th, in an unanimous judgment, the Quebec Court of Appeal dismissed the joint appeal filed by Premier Tech (PT) and its controlling shareholder, Gestion Bernard Bélanger (GBB), against the judgment rendered on November 21, 2013 by Mr. Justice Clement Samson of the Superior Court. The Court of Appeal sided with Miller Thomson client, Christian Dollo, who had engaged in a five-year long judicial battle to recover close to $2,000,000 of stock options. Dollo lost the stock options as a result of his unjust termination, which had been devised by PT's majority shareholder and CEO, Bernard Bélanger, whose conduct was criticized by the Court.
The facts in issue:
In 2010, Dollo was the CEO of PT's biggest subsidiary, Premier Tech Horticulture. Since 2001, he had been a participant in the PT stock option plan (the “Plan”); at the time PT was a public corporation, but reverted to private status in 2007. From 2001 to 2010, Dollo was granted and vested more than 200,000 stock options and was also a shareholder of PT, a company incorporated under the CBCA. In June 2010, the stock options were valued at close to $2,000,000. Dollo had no intention of exercising the options in the future, as they had tripled in value since 2007. Also, Dollo considered the options to be his “pension fund” and no other executive of PT had exercised their stock options.
However, in March 2010, in the context of the settlement of his divorce proceedings, Dollo reviewed the provisions of the Plan initially adopted in 1987 and maintained in force when PT privatized itself in 2007. He then realized the Plan contained a provision stipulating that the holder of stock options loses all stock options, including all vested options, even if the termination is without cause. Dismayed and troubled by the abusive character of the provision, Dollo met with Bernard Bélanger, to discuss the dire consequences which could result from the application of the clause, even if his termination was without cause. Bélanger attempted to reassure Dollo by stating “what is vested is yours” ( 'ce qui est gagné est gagné´). Dollo then pointed out to Bélanger that the Plan provision says the exact opposite whereupon Bélanger suggested that Dollo meet with PT's CFO, Martin Noel, to discuss the issue. Noel confirmed Dollo's interpretation of the provision, but tried to reassure him by stating that never would the Bélangers fire him without letting him exercise the options, thus confirming Dollo's options were at the mercy of Bélanger.
A few weeks later, in April, while Dollo attended his annual performance review with his immediate boss, Jean Bélanger, Bernard Bélanger's son, Dollo requested that the Plan provision be modified. Later in July, Dollo again met with Jean Bélanger and requested a follow up; Jean Bélanger told him not to worry because he was not at risk of losing his job. Dollo went on vacation and a few weeks after his return, Bernard Bélanger scheduled a meeting with him. At the very start of the meeting, he told Dollo that he was terminated immediately, offered him a severance package and tendered him a Call document, forcing Dollo to sell all of his shares to GBB. Dollo was stunned, but asked Bélanger what would become of his stock options. Bélanger refused to address the matter. Dollo had suddenly lost $2,000,000.
A few days later, Dollo wrote to the board of directors of PT, which was responsible for the application of the Plan and also had the power to permit Dollo to exercise the options despite the terms of the provision. It should be noted that had the Board agreed with Dollo, PT would have received a substantial amount from Dollo, but GBB, the controlling shareholder, would have had to disburse an even greater amount to buy the shares back from Dollo, as per the terms of the PT shareholder's agreement. Three months later, Dollo was advised that his request was refused. Unbeknownst to Dollo, the board members had based their decision on a legal opinion prepared by GBB's law firm, which ultimately ended up appearing for both PT and GBB before the Superior Court. This was an obvious conflict of interest.
Convinced he was the victim of a profound injustice that the board members did not act in a fair and impartial manner (all board members are exclusively appointed by GBB) Dollo, with the assistance of Miller Thomson, initiated an oppression remedy procedure before the Superior Court. He requested that the Plan provision be declared abusive, that he would be authorized to exercise the options and that GBB would be compelled to purchase the shares, as per the terms of the PT shareholder's agreement. After a six day trial, Justice Clement Samson fullyagreed with Dollo. He further added that Dollo was a credible witness and clearly stated he did not believe both Bélangers when they denied having reassured Dollo he would not be fired without having the right to exercise the options. He chastised the members of the board for blindly relying on the legal opinion provided by the majority shareholder when they refused Dollo's request to exercise the options. Justice Samson also ruled that the provision of the Plan was abusive and that Dollo had been fired without cause. GBB was ordered to buy the shares resulting from the exercise of the options by Dollo.
GBB and PT filed a joint appeal, but decided to be represented by separate law firms. They attacked every conclusion of the judgment, which was maintained by the Court of Appeal for two main reasons. Firstly, the Court felt both Bélangers failed to follow up on the representations made to Dollo that convinced him that his employment was not at risk and enticed him not to exercise the options. The Court was especially critical of the conduct of the board. which it considered oppressive. The board only considered the interests of the majority shareholder and not the legitimate expectations of Dollo to exercise his options, a privilege which the board had already granted to another executive dismissed in similar circumstances. In addition, since GBB had not purchased the shares in the delay provided by the initial judgment, Dollo was also awarded interest on the sales price in accordance with the provisions of the shareholder's agreement.
The takeaway from this important judgment is that executives and the corporations they control will be taken to task if they are not true to their word. Also, board members should always carefully balance the interests of the corporation they are appointed to serve and those of its majority shareholders. In this instance, it was particularly disappointing to see so-called “independent” board members, in fact, had very lucrative business dealings with PT and had simply turned deaf ears to Dollo's request.
It remains to be seen whether PT and GBB will seek leave to appeal before the Supreme Court.