The appeal of stock option plans (SOP) is undeniable. Indeed, by linking employees' personal gains to the growth of the company's share value, a SOP offers a flexible form of compensation as well as a long-term incentive program.

That being said, is it lawful to stipulate that an employee will lose his rights to unexercised stock options should his/her employment be terminated for any reason? That is the question the Quebec Court of Appeal had to answer in Premier Tech ltée c. Dollo, 2015 QCCA 1159.

In this case, the Court of Appeal ruled that a provision in a SOP stipulating that an employee will lose his/her right to unexercised stock options upon termination of employment is not inherently abusive.

Furthermore, the Court concluded that through the conduct of the officers and the representations made to Mr. Dollo before the termination of his employment, Premier Tech and its controlling shareholder encouraged Mr. Dollo to adopt a position detrimental to his interests. Therefore, the Court of Appeal concluded that Premier Tech acted oppressively within the meaning of Article 241 of the Canada Business Corporations Act (CBCA).

A. Factual Background

Mr. Dollo was a Senior Executive of Premier Tech, hired in 1999 as Vice-President of Finance and promoted to President of the subsidiary, Premier Horticulture in 2004.

In 2007, during a privatization process, Premier Tech eliminated its SOP and replaced it with a new one. Section 8.01.2 of the new SOP provided that any participant would lose the option to purchase shares at the termination of their employment whether they were terminated for serious reasons or not. The clause nonetheless gave the Board of Premier Tech the discretion to "decide otherwise."

Following the privatization, Mr. Dollo held 60 000 options and 10 000 shares further to the exercise of a portion of his options.

In the Spring of 2010, when the branch that he presided over was under-performing, Dollo discussed the implications of Section 8.01.2 with the principal executives of Premier Tech. They in turn assured him that the stock options he had accumulated up to that date were his: "what is earned is earned." Nonetheless, when Dollo's employment was subsequently terminated in August 2010, his shares were redeemed, but the Board of Directors of Premier Tech applied Section 8.01.2 of the SOP and refused to allow him to exercise his options.

B. The Court of Appeal's Decision

Section 8.01.2 Is Not Abusive

This Section is not abusive in and of itself, since it gives the Board of Directors of Premier Tech the discretion to circumvent the clause in cases where its application could cause an unfair result.

The Court also ruled that the trial judge should not have accepted expert evidence to the effect that the inclusion of a Section similar to 8.01.2 diverges from common practice in the industry. The Court of Appeal ruled that such evidence is unreliable and irrelevant : a commonly used clause is not by that fact lawful, just as a clause not commonly used becomes automatically unlawful and abusive.

The Conduct of the Officers of Premier Tech was Oppressive

The Court of Appeal emphasized that recourse to the oppression remedy at Article 241 of the CBCA is broad and targets not only fraud, bad faith or illegality, but also unfair situations arising from an abuse of rights and violations of the legitimate expectations of shareholders.

The Court of Appeal concluded that the officers of Premier Tech had falsely reassured Dollo that his options could be exercised should his employment be terminated. The Court of Appeal also accepted Dollo's statement that in the absence of such promises, he would have exercised his options before his employment was terminated.

The Court therefore concluded that Dollo was entitled to expect to be able to exercise his options even after his employment was terminated. Considering this legitimate expectation, the Board of Directors had the obligation to intervene and not apply 8.02.1 of the SOP. By refusing to exercise its discretion to this effect, the Board of Directors acted in a manner that was oppressive and unjust towards Dollo.

C. To Be Followed…

After reading this decision of the Court of Appeal, the question remains as to whether the result would have been the same if not for the fact that the litigious provision gave the Board of Directors the discretion to circumvent. It will be interesting to see whether the decision of the Court of Appeal will be brought before the Supreme Court of Canada and whether similar provisions, that do not give a Board of Directors any discretion, will be declared valid by the courts in the future.