Stock option blocked

Employee entitled to exercise stock option subsequent to tendering letter of resignation

On June 17, 1996, Bradley David Katz commenced employment as the manager of information systems with the Royal Pipe Company, a division of Royal Plastics Limited (which became Royal Group Technologies Limited in 1997). On July 26, 1996, as part of his employment contract, Mr. Katz entered into a stock option agreement with his employer.

The stock option agreement gave Mr. Katz the right to purchase 2,000 shares at $20 per share. If he chose to exercise his option, Mr. Katz was to contact Nesbitt Burns who would confirm matters with the employer. Once confirmed Nesbitt Burns would sell the stock at the current price and remit to Mr. Katz the sale price less $20.00 per share. Prior to Jan. 27, 2000, Mr. Katz had not exercised any of his stock option rights.

The stock option agreement contained a provision dealing with termination of employment. In the event that Mr. Katz chose to resign his employment or if his employment was terminated for cause, Mr. Katz lost his right with respect to unexercised options.

In late 1999 or early 2000 Mr. Katz was offered employment with another firm at a higher salary. On Jan. 27, 2000, Mr. Katz gave notice of his intention to resign with Royal Group Technologies as of Feb. 9, 2000. He continued working as manager of information systems until that date.

On Jan. 28, 2000, Mr. Katz attempted to exercise his stock option. He contacted the designated person at Nesbitt Burns. Mr. Katz was advised that Royal Group had blocked the exercise of his stock option. When he spoke to members of the Royal Group management, he was informed that he had forfeited his stock option rights by his resignation.

In January 2001 Mr. Katz commenced an action against Royal Group Technologies, seeking a declaration that Royal Group had breached the stock option agreement. He sought damages for breach of contact in the amount of $25,000.

The Court held that Royal Group had breached the stock option agreement with Mr. Katz. Although Mr. Katz had given his notice of intent to resign on Jan. 28, 2000, his resignation date was Feb. 9, 2000.

Royal Group accepted the notice and continued to employ Mr. Katz in his managerial position until his last day of work of Feb. 9, 2000. On Jan. 28, 2000, when Mr. Katz exercised his stock option, he was still an employee and his resignation had not taken effect because the termination date had not yet arrived.

In assessing damages the Court looked to the value of the stock on Jan. 28, 2000, the date on which Mr. Katz exercised his stock option rights. The value on that date averaged $28.62. Damages were assessed at ($28.62 per share less $20) x 2,000 shares for a total of $17,240.

For more information:

Katz v. Royal Group Technologies Ltd., Ontario Superior Court of Justice, Docket No. Toronto 01-CV-203565SR, Nov. 22/01.

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