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Will the Supreme Court’s decision in Matthews v. Ocean Nutrition Canada Ltd. bring Quebec courts to their LTIPping point?

Will the Supreme Court’s decision in Matthews v. Ocean Nutrition Canada Ltd. bring Quebec courts to their LTIPping point?

It is common for some employees to have a variable compensation structure that includes base salary, short-term incentive plans (STIP) and long-term incentive plans (LTIP). If the employee is terminated without cause, all aspects of an employee’s remuneration must be included when determining the amount of their indemnity in lieu of reasonable notice.

Quebec courts regularly include the STIP amounts in that calculation. However, LTIP payments, which can include options or restricted share units that can only be exercised at a future date, are another story.

In Gilman c. Fieldturf Tarkett Inc.[1], the Superior Court awarded several plaintiffs the final tranche of their incentive payment after they were dismissed without cause:

“[62] Since the intention of the phantom share program was to motivate the plaintiffs and secure their loyalty until at least 2008, it was not a reasonable exercise of the defendant’s discretion to refuse a final bonus payment to the plaintiffs.

[63] At least one Canadian court has held that a stock option plan creates a unilateral contract that binds the employer once it is accepted by the employee through his continuing employment. In the present case, the phantom share program was an agreement between Tarkett and the defendant made for the benefit of key employees. Once the plaintiffs had accepted the stipulation in their favour by continuing to work at the defendant company, they were entitled to claim the phantom share bonus.”

The Court of Appeal confirmed this judgment stating:

« [18] Le droit québécois reconnaît que des bonis et des programmes d’option d’achat d’actions font partie de la rémunération globale et sont généralement dus dans le cadre du délai de congé. »[2]

Yet in the 2020 decision of Leyne c. PSP Investments[3], the Quebec Superior Court refused to award the employee his entitlements under the LTIP during the 9-month notice period:

“[95] Courts distinguish incentives which are paid for performance and which are compensatory in nature, generally in the form of annual bonuses, and long term incentives which are prospective. Indeed, by their nature and their purpose, long term incentive plans, such as stock options, RSUs/RFUs or phantom shares are usually crafted to be paid out in the long term in order to ensure that the employee remains loyal to the company and focuses on long term profitability as opposed to a short term gain.

[96] When the employment is terminated with immediate effect, the eventual value of the incentive is not foregone because the employee was given insufficient, or no notice of termination. It is lost because the termination of the employment does not allow the employee to be present in the long term and to capitalize on any award. It is the termination of the employment and not the insufficient notice which is the cause of the employee’s loss of chance to capitalize on unvested awards. Article 2092 C.C.Q. is therefore of no use to the employee as it addresses the consequences of insufficient notice, not of the termination of the employment. Indeed, the Civil Code of Quebec allows either party to terminate a contract of employment.”

But will the Supreme Court’s recent decision in Matthews v. Ocean Nutrition Canada Ltd.[4] change how Quebec courts deal with LTIPs?

Matthews, an experienced chemist, had worked for Ocean since 1997. In 2007, a new COO joined Ocean and began a campaign to marginalize Mr. Matthews at the company. In 2010, Matthews was placed under review. Around this time, Ocean was being considered for a sale, which would have allowed Matthews to realize on Ocean’s LTIP.

In June 2011, Matthews left Ocean, claiming constructive dismissal. Thirteen months later, the company was sold for $540 million. Since Matthews was no longer actively employed with Ocean as required by the plan, the company refused to pay him his award even though the triggering event occurred during the reasonable notice period awarded for his constructive dismissal. Matthews successfully sued for the LTIP payment.

The Supreme Court stated:

“[49] Insofar as Mr. Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during the 15-month period. This is so because the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing “what the employee would have earned in this period”.

(…)

[55] Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?”

Since the purpose of damages in lieu of reasonable notice is to put the employee in the position he would have been in had he worked through the notice period, and since the Realization Event occurred during the notice period, Matthews was entitled to the LTIP payment. As for the requirement that he be actively employed in order to receive the payment, the language of the clause in question was not sufficient to remove his common law right to damages.

The question remains as to if and how the Quebec courts will adapt the principles set out in Matthews to a civil law analysis of LTIP payments. Stay tuned…

__________________________________
[1] 2012 QCCS 1429
[2] 2014 QCCA 147
[3] 2020 QCCS 240 (on appeal)
[4] 2020 SCC 26

 

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