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CHAUDHRI: Terminated executives entitled to more than they may think

In the executive compensation landscape, restricted stock units are no longer a side note, they are often the main event

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For most senior executives, their compensation structure often includes restricted stock units (RSUs) or stock options.

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These financial incentives are meant to encourage retention and high performance as they are granted on one date with vesting schedules that often span over three to four years.

CHAUDHRI: Terminated executives entitled to more than they may think Back to video

The catch? You must remain employed for the vesting period to see a payout.

When a senior executive is terminated, employers often ‘cancel’ unvested equity, denying executives any pay out on the unvested portions. These amounts range from the thousands of dollars to the millions.

In the recent Ontario case Adelman v IBM Canada Limited, the Ontario Superior Court sent a clear message: unvested equity is definitely a head of damages in a wrongful dismissal case.

Mr. Adelman, a 59-year-old executive director with 18.5 years of service, was dismissed from IBM without cause. With no termination clause limiting his entitlements, the Court awarded him a 24-month notice period. The most significant financial consequence, however, flowed from IBM’s decision to cancel his unvested RSUs and stock options.

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Like many employers, IBM assumed that unvested equity, or RSUs, would terminate on the date the employee was let go. This assumption was baked into their Equity Award Agreement. Acting on that belief, it cancelled equity that would have vested during what the Court later found to be the reasonable notice period.

That assumption proved costly.

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The Court found the Equity Award Agreement language ambiguous and therefore insufficient to contract out of Mr. Adelman’s common-law right to compensation during the notice period. The message is familiar but unforgiving: if employers want to oust common-law entitlements, the wording must be crystal clear. Anything less defaults to the employee.

Importantly, once IBM acknowledged at trial that the cancellation was contrary to law, the only remaining issue was valuation.

Here, the court refreshingly took a practical approach: what would have happened had Mr. Adelman remained employed?

The answer to this resulted in a $269,508.27 damages award for improperly cancelled RSUs and stock options. The evidence presented to the court showed that he followed a consistent, passive investment strategy. He typically held vested equity for an average of 402 days before selling into the market.

The court accepted that this pattern would have continued and calculated damages based on market values at the implied sale dates.

The takeaways from this case are important to employers and employees alike.

– If your equity agreements are intended to extinguish common law notice rights, the language must be ironclad, and should be reviewed by a lawyer.

– Do not rely on the standard assumption of “vesting ends on termination.” Courts scrutinize these provisions closely, and it could result in high damages. 

– Valuation risk is real, particularly for long-service executives with predictable trading patterns.

– Unvested equity is often a lucrative head of damage you may pursue post termination.

– Your historical investment habits may directly influence the amount your RSUs are valued at in court. 

– Equity can represent one of the largest components of wrongful dismissal exposure. Don’t blindly accept the employer’s assumptions. Speak to an employment lawyer to learn your options. 

In the executive compensation landscape, RSUs are no longer a side note. For high-earning executives, they are often the main event.

– This column was co-written by employment lawyer Sunira Chaudhri and her associate Samantha Khaouli

Have a workplace problem? Maybe I can help! Email me at sunira@worklylaw.com and your question may be featured in a future column.

The content of this article is general information only and is not legal advice.

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