Written by Talia Bregman, Carl Cunningham and Jordan Fremont
In Battiston v. Microsoft Canada Inc., 2020 ONSC 4286, the Ontario Superior Court held that a contractual provision (that unambiguously excluded the employee's rights to unvested stock awards after he was terminated without cause) was unenforceable because the employer failed to sufficiently draw the particular provision to the employee's attention. As a result, the Court awarded the employee damages in lieu of his stock awards that would have vested during the notice of termination period, thereby increasing the employer's severance costs.
This is a noteworthy decision for employers as it emphasizes that well-drafted contractual provisions which purport to limit an employee's entitlements (in this case, to post-termination vesting of stock option awards) may not be sufficient to withstand judicial scrutiny where those contractual provisions are considered harsh and oppressive. The decision in Battiston suggests that additional steps should be taken by employers to very clearly highlight and draw these kinds of provisions to the attention of employees.
In 2018, Microsoft Canada Inc. terminated Fransic Battiston's employment without cause after almost 23 years of service. In response, Battiston sued Microsoft claiming, amongst other things, that his unvested stock options should have vested during the common law notice period.
During his employment, Microsoft had awarded Battiston stock options as part of his annual compensation. For each award, Microsoft sent Battiston an email directing him to read the terms of the applicable stock award agreement and then complete an online acceptance process, which would serve as the record that the terms of the stock award had been read, understood and accepted.
As is common for equity compensation awards, a term of the stock award agreement provided that any unvested stock options would terminate on the cessation of Battiston's employment. Relying on this term, Microsoft took the position that Battiston was no longer entitled to the vesting of stock options once his employment ended.
At trial, Battiston testified that he had completed the online acceptance for each year that he received a stock award without actually reading the lengthy stock award agreement, despite being directed to do so by Microsoft. Battiston also testified that Microsoft did not draw the termination provision to his attention in any other way.
Issue and Outcome
One of the principal issues before the Court was whether Microsoft could rely on the termination provision in the stock award agreements. Although the Court noted that Microsoft was permitted to oust Battiston's entitlements to unvested stock options post-employment and the termination provision in question unambiguously achieved that goal, the Court ultimately concluded that the provision was not enforceable. The Court reached this conclusion because Microsoft failed to take reasonable measures to bring this "harsh and oppressive" provision to Battiston's attention—simply stating in an email that the terms of a stock award agreement will govern and directing an employee to read that agreement was not sufficient, in the Court's opinion.
The result was that Battiston was awarded damages for the stock options that would have vested during the 24-month notice period.
Practical Takeaways for Employers
In light of this decision, there are several practical steps that employers might take to mitigate against similar outcomes. In particular, for incentive plans, employers should consider:
- Taking additional steps to bring termination and other provisions which purport to limit or otherwise restrict significant employee entitlements (and could therefore be construed as "harsh and oppressive") to an employee's attention by, for example, summarizing those provisions in a cover email or memorandum that attaches the award agreement or incentive plan, rather than only providing employees with a copy of the incentive plan and placing the onus on employees to read the plan.
- Updating their template grant agreements and template employment agreements to expressly draw attention to, and explain, the termination provisions in incentive plans, as opposed to simply cross-referencing to the plan.
- Requiring employees to sign an acknowledgement under which the employee acknowledges having received and read the incentive plan, "including the termination provisions in section X", as a condition to receiving an equity award.
If you have any questions arising out of the matters reviewed above, please contact the Bennett Jones Employment Services Practice group.