According to the Court of Appeal of Québec’s Le Château inc. v. Niro,1 a notice or severance period provided for in an employment agreement does not postpone the employment termination date so as to allow the employee to exercise stock options that would have vested during the notice period.

When he was hired, Mr. Niro signed an employment agreement providing for a stock option plan to purchase company shares, among other work conditions. That same agreement also provided for a written 12-month notice should Mr. Niro’s employment be terminated without cause, and gave the employer full discretion over whether or not the employee was required to work during that notice period. The agreement also stated that options which had vested but were not exercised before the employment termination date had to be exercised within 90 days of that date, any options not vested becoming null and void.  

After a few years of service, the company terminated Mr. Niro’s employment, gave him the notice stipulated in the agreement and exempted him from his obligation to perform his work during the period in question. However, during the notice period, a significant number of Mr. Niro’s options would have vested and could have been exercised had he not been dismissed. Mr. Niro filed a motion for declaratory judgment before the Superior Court to establish his right to exercise those options.  

The Superior Court found in favour of the former employee, ruling that the employment termination date was the date of the end of the notice period, regardless of the date on which Mr. Niro stopped working. He would therefore be able to exercise a significant number of options.

The Court of Appeal disagreed and quashed the Superior Court decision, opining that work performance is an essential component of an employment relation. The Court added that the employer’s decision not to require that work be performed marked the end of Mr. Niro’s employment, despite his right to the notice period stated in the agreement or, in the absence of an agreement, to the reasonable notice (severance) prescribed by law.

In its grounds, the court raised the interesting point that the employment agreement was drafted so as to provide that only the “salary” remained payable during the unworked notice period, not the “compensation” or “benefits”, in which case the court could have come to a different conclusion.

For employers who offer stock option plans to their employees, this decision certainly clarifies issues associated with employment termination dates and the right to exercise options that vest during a notice period. However, this ruling cannot be applied blindly to all cases that share similar traits. The Court of Appeal states that the employment termination date is a matter of fact; further, the Court’s determination stems from a declaratory judgment where neither the adequacy of the notice period nor the damages flowing from any inadequacy of notice were at stake.