In an interesting executive employment decision, the Ontario Superior Court of Justice recently upheld a contractual provision that resulted in forfeiture of restricted share units after resignation in Levinsky v The Toronto-Dominion Bank.
The Plaintiff, a Vice President and Managing Director at TD Bank, participated in the Bank’s Long Term Compensation Plan. The Plan granted the Plaintiff Restricted Share Units each year. Under the Plan, shares that had not yet matured would be forfeited upon resignation. The Plaintiff resigned in 2010, and accordingly, lost his entitlement to shares allocated to him in 2007, 2008 and 2009. The value of the shares was over $1 million. The Plaintiff argued that the requirement to forfeit shares on resignation was a restrictive covenant and unreasonable and therefore unenforceable. He also argued that it was an unreasonable restraint on trade.
The Court rejected the Plaintiff’s argument regarding unenforceability of the contractual provisions. The Court concluded that the Plaintiff was a sophisticated business man and knew the terms of the plan when he agreed to them. The judge reviewed the jurisprudence involving contracts with unreasonable restraints on trade and noted the following principles. First, employment contracts with provisions that forfeit future entitlements can be characterized as a contingent right rather than a restraint on trade. Second, a clause will not constitute a restraint on trade where it does not preclude the employee “from going anywhere and doing anything he chose to do.” The judge concluded that in assessing a contract term that purports to restrain trade, the court must consider whether the forfeiture, on its face or in practice, is tied to the end of employment, or whether it is tied to an employee’s conduct following termination. If it is tied only to the termination of employment, the clause will not act as a restraint on trade, and therefore will be enforceable.
In the Plaintiff’s case, the contract did not reference post-termination conduct, and was a form of loyalty inducement rather than a restraint on trade. The Plan did not create vested rights for the Plaintiff. Rather it denied a future benefit where the employee did not continue working for the Bank. This is not a restraint on trade post termination.
This case is a useful example of a sophisticated employee being held to the terms they negotiated in the employment contract. It also defines the limits of a restraint on trade to only restrictions that occur post-employment. Where loss of entitlements occurs upon termination, such terms will not be rendered unenforceable as an illegal restraint on trade. This is particularly so where the purpose of such provisions is to incentivize employees to remain in employment.
It should be noted that this fact situation involved a resignation. Whether such provisions are enforceable upon termination without cause would be a different question. In that scenario the language of the agreement will be very important to determine when and how future entitlements come to an end at termination.