Denial of 750,000 Stock Options? Ontario Court of Appeal Upholds Oppression Remedy

For many in the private sector, especially those in early-stage/higher-risk enterprises, securities-based pay, for example, equity, stock options and RSUs, is an important part of a total compensation package.   But what happens if a company arbitrarily restricts or cancels this compensation, without other consideration?

A recent, unanimous decision by the Ontario Court of Appeal in Justein v. DeFi Technologies Inc. 2023 ONCA 615, affirmed that the arbitrary cancellation or withdrawal of stock options constituted oppression, pursuant to section 248 of Ontario’s Business Corporations Act R.S.O. c. B.16 (‘OBCA’).  Implicit in their decision was the confirmation that stock options are indeed a form of securities as contemplated by the Act.

The Grant and Repudiation of the Options 

What happened?  In late 2020, an advisor to the company was issued a grant of 750,000 stock options as part of his overall compensation.  The grant was approved by the board of directors, it was announced publicly by way of press release in filings with the Ontario Securities Commission, and at the company’s annual general meeting.  The grant was also affirmed by the company’s in-house counsel. The advisor shared his options with a fellow advisor who had been assisting him.

In September 2021, the advisors attempted to exercise roughly half of the options, 367,500 in total.  They were then informed that the option grant had been cancelled, purportedly because the advisors were not ‘consultants’ and therefore did not meet the requirements of DeFi’s stock option plan.  There had been no prior indication or notice that the advisors had become ineligible for the plan.  Given this news, the advisors understandably did not attempt to exercise the remainder of the options.

Oppression Remedy & Breach of Contract

The advisors then brought an application to the court seeking damages for the deliberate breach of the stock option agreements, pursuant to either contract law or via the oppression remedy in the OBCA.  The oppression remedy can apply when a stakeholder’s reasonable expectations are not met, due to the deliberate acts or omissions of a corporation. 

To establish oppression, the test set out by the Supreme Court in BCE Inc. v. 1976 Debentureholders [2008] 3 S.C.R. 560, 2008 SCC 69 must be met:

1.     Are the complainants’ expectations reasonable?

2.     Were those reasonable expectations breached?

3.     Does the conduct complained of amount to oppression, unfair prejudice, or unfair disregard?

First, it’s certainly reasonable to expect to benefit from promised compensation, in this case the stock option plan.

Next, was this expectation breached?  It is clear that DeFi’s cancellation of the advisors’ participation in the plan constituted a breach.

Lastly, does the nature of DeFi’s cancellation rise to the level of oppression, unfair prejudice or unfair disregard?  

Despite having granted the options in the first place, the corporation argued that the recipients were ineligible, the expectation to exercise the options was not reasonable, and that the advisors’ forfeited any remaining options because they had allegedly failed to attempt to exercise them after the corporation had already repudiated the agreement.  It was clear that the treatment of the advisors was arbitrary, unsupported, and unjustified by the company’s own public and private pronouncements.  Thus, all parts of the BCE test were met.

Summary 

The court correctly rejected DeFi’s circular arguments and awarded the 750,000 options to the advisors based on the average share price between the date the advisors attempted to exercise the options and the expiry date of the same options.

In calculating total compensation, whether it is for an ongoing business relationship or as part of severance, securities-based pay is an important element and should not be discontinued or discarded on a whim, and certainly not without consideration.  To do otherwise is not only not right, but it can expose both the corporation and its directors and officers to unnecessary liabilities.