Failure to Give Proper Notice of Forfeiture of Unvested Stock Options Makes Clause Unenforceable :

In Battiston v Microsoft Canada ( 2020 ONSC 4286 ) Justice Faieta had to determine the enforceability of a clause in a Stock Option Agreement that said in essence that the employee’s entitlement to have the benefit of future unvested stock options ceased immediately upon the cessation of employment, even where that termination was unlawful.

The Judge found that ” the Stock Award Agreement unambiguously excludes Battiston’s right to vest his stock awards after he has been terminated without cause.”

Normally you would think that the Plaintiff would therefore lose the argument.

But you would be wrong.

[70]           I find that the termination provisions found in the Stock Award Agreements were harsh and oppressive as they precluded Battiston’s right to have unvested stock awards vest if he had been terminated without cause.  I also accept Battiston’s evidence that he was unaware of these termination provisions and that these provisions were not brought to his attention by Microsoft.  Microsoft’s email communication that accompanied the notice of the stock award each year does not amount to reasonable measures to draw the termination provisions to Battiston’s attention.  Accordingly, the termination provisions in the Stock Award Agreements cannot be enforced against Battiston.  Battiston is entitled to damages in lieu of the 1,057 shares awarded that remain unvested.

In other words, the ” harsh and oppressive ” provision was buried in the plan text and there is no evidence that the employer brought this to the attention of the employee.

It looks like this case stands for the proposition that where the employer wants to rely on a termination type clause, they must bring it to the employee’s attention and if they fail to do so , and the employee testifies that he never saw it , the employee wins. It would also seem that the defendant  has the burden of proof on this issue, once the plaintiff says that he or she never saw it .

Lessons learnt from this case.

  1. The more harsh and oppressive a clause is,  the more likely a Court will find a way around it . So Lesson # !. Don’t draft harsh and oppressive termination clauses.
  2. As the employer must prove that the clause was brought to the attention of the employee do so in a transparent and clear way. So Lesson #2. Instead of burying the clause in a complicated legalese filled document ( like a consumer licensing agreement which is designed not to be read) rather insert the termination provision in every letter granting the award and get the employee to acknowledge that he or she has read that particular  provision . I even have drafted the clause  for you :

” Please note that all of the nice stuff that we promised you in this  letter will be forfeited if we decide to fire you for any reason, even if we fire you illegally. So don’t you go buying a new house on the assumption that you will ever get any of these options, because we may fire you the day after you sign the house deal and there ain’t nutting you can do about it . ” 

One other thing. Plaintiff counsel also made the argument that the clause was contrary to the ESA, presumably because the clause changes the terms of his compensation within the statutory termination period. The judge decided he did not have to decide this issue. This is a shame because this critical issue needs to be resolved some day . Even the Supreme Court of Canada shied away from looking at ESA arguments in Heller v UBER.

One more comment. In his conclusions, the judge ordered compensation for these lost stock options in the following manner:

5)   Battiston is awarded damages for the granted stock awards that would have vested during the notice period had his employment not been terminated.  Such damages are to be assessed as of the date of the breaches using the closing market price for the stock on those dates.

One can make many arguments as to how to properly measure the loss of stock options. This method  assumes that the  employee would have cashed in his shares on the vesting date. Any other method leads to speculation . Although not perfect, this method is at least certain and easy to calculate.

My very rough calculation of the value of this part of the award is approximately $150,000 USD. I came up with this number  by looking at the average price of Microsoft from date of termination to the present .