Stock option plans are a common incentive to attract qualified employees and encourage their productivity. But how must you deal with stock options that have not yet been exercised by the employee when he is terminated?

The Quebec Court of Appeal addressed that question in Premier Tech Ltée c. Dollo, 2015 QCCA 1157.

The facts

Christian Dollo joined Premier Tech in 1999, in a senior management position. He eventually became CEO of a subsidiary of Premier Tech. In August 2010, Mr. Dollo was terminated, allegedly because of his insufficient performance. At that time, Mr. Dollo held a number of unexercised options for Premier Tech shares.

The analysis of the Court of Appeal

The key clause in the stock option plan applicable to Mr. Dollo read as follows:

Should the Beneficiary cease to be employed by the Company for any reason other than his death, retirement or invalidity, any and all options in force will lapse at the time of termination. At that time, the Beneficiary will lose all his rights respecting the shares for which he has not exercised his options unless the Board, at its sole discretion, decides otherwise. [our translation]

The debate before the Court of Appeal turned on two arguments.

Is the clause per se abusive? Mr. Dollo held that it was, merely because it causes the holder to lose a right upon termination. And, since the stock option plan is a contract of adhesion — a contract imposed by the employer and that cannot be negotiated with the employee —, any abusive clause that it contains is null (art. 1379 and 1437 of the Civil Code of Québec). The Court did not agree: the clause “is in no way abusive, especially since it gives Premier Tech’s directors the power to set it aside” [our translation].

However, the Court did agree that Mr. Dollo, who already was a shareholder, had been the victim of oppression by the company, a finding that opens the door to remedies under s. 241 of the Canada Business Corporations Act. A few months before he was fired, as the relationship between the parties was becoming tense, Mr. Dollo had been told by his superiors that he was not to worry about his future with the company. When he did inquire about his stock options, he was replied that “what has been earned is earned” [our translation], thus allowing him to conclude that he had vested rights and that he could safely wait to exercise them.

As the Court saw it, by refusing to respect their word and by abusing Mr. Dollo’s trust, the company’s behaviour amounted to oppression.

What you must keep in mind

The consequences of this behaviour were quite onerous for the company: it was ordered to issue 207,619 shares, providing $612,857 as interest-free financing, and to buy back the shares at a price of $1,926,704.

The lessons to be drawn from this decision are very clear:

  • Drafting a stock option plan is a delicate exercise that must be entrusted to an expert;
  • Terminating an executive can only be done after a careful examination of all possible consequences.