On October 18, 2021, the Ontario Court of Appeal released its decision in Battiston v Microsoft Canada Inc., 2021 ONCA 727, in which it overturned the trial court's finding that termination provisions in a stock award agreement could not be enforced against the dismissed employee, Francis Battiston. At trial, the Ontario Superior Court of Justice held that Battiston had not received sufficient notice of the termination provisions in a stock award agreement, that those provisions could not therefore be enforced and that Battiston was therefore entitled to damages in lieu of the stock awards that would have vested through his reasonable notice of termination period. The takeaway from the trial court's decision was that an employer must take extra steps to draw employees' attention to termination provisions within incentive plans in order to rely on those provisions.

Although the Court of Appeal's decision is welcome news for employers who award their employees equity incentives under contractual provisions limiting entitlements when employment ends, taking additional steps to flag those provisions for employees is still a best practice.

Background

As discussed in Employment Terms that are "Harsh and Oppressive" Require Additional Notice, the trial court had found that Battiston had been provided with a stock award agreement which included termination provisions, and that those termination provisions clearly ousted Battiston's entitlements to unvested stock awards after he was terminated without cause. Nonetheless, the trial court ruled that the termination provisions were unenforceable because Microsoft failed to adequately bring them to Battiston's attention. Specifically, the trial court held that requiring Battiston to complete an online acceptance process to confirm that he read, understood and accepted the stock award agreement, over a 16-year period, was not sufficient, especially since Battison admitted he accepted each award without actually reading the agreement.

As a result of the trial court's decision, Battiston was awarded damages for the stock options that would have vested during his reasonable notice of termination period (determined to be 24 months), thereby significantly inflating Microsoft's severance costs.

The trial court's decision was noteworthy for employers as it emphasized the importance of taking extra steps to bring potentially "harsh and oppressive" terms (in the words of the trial court) to the attention of employees—in this case, to provisions under which unvested equity awards would be forfeited post-termination.

Court of Appeal's Decision

The Ontario Court of Appeal overturned the trial court's decision. The Court of Appeal noted that the trial judge erred in concluding that Battiston had not received sufficient notice of the stock award agreement's termination provisions given the fact that: (i) for 16 years, Battiston expressly agreed to the terms of the stock award agreement (which included its termination provisions); (ii) Battiston made a conscious decision not to read the agreement despite indicating that he had read it; and (iii) by misrepresenting his assent, Battiston put himself in a better position than an employee who did not misrepresent, thereby taking advantage of his wrongdoing.

It is not yet clear if Battiston intends to seek leave to appeal to the Supreme Court of Canada.

Practical Takeaways for Employers

Although the Court of Appeal's decision is a welcome result for employers who provide employees with incentive compensation, to further enhance the enforceability of termination and other limiting (e.g., forfeiture) provisions within an incentive plan, a practical takeaway remains that it is still a prudent and best practice to take extra steps to flag these provisions for employees.

In light of this, employers should still consider doing the following in respect of their incentive plans:

• Summarizing termination provisions which purport to limit significant employee entitlements in a cover email or memorandum that attaches the 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 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 award.

While these steps may not be strictly legally necessary in view of the Court of Appeal's decision in Battiston, they remain a prudent and best practice as the law in this area may continue to evolve and receive additional clarification.