The British Columbia Supreme Court has ruled employers don’t necessarily have an unfettered right to dictate the terms of a repurchase of shares held by former employees under a stock option plan.
“The message is that even when discretion is granted under the terms of a plan, that discretion is not necessarily unlimited, and it’s important to follow a proper process,” says Craig Ferris, a litigation and dispute resolution partner at Lawson Lundell LLP, who represented the former employees. “The decision also stands for the proposition that even executives who have full powers of attorney can’t sign anything they want.”
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Kimberly Kaplan and Kaylee Astle, previously employed by Spocket Inc., both exercised their share options on leaving the company. Both had previously agreed to the company’s right of first refusal, a document that regulated share transfers but didn’t give the company a unilateral right to compel repurchase.
Both also signed a power of attorney appointing Saba Mohebpour, Spocket’s chief executive officer, as their attorney, granting him full rights of substitution to sign corporate documents, including shareholder consents and amendments to shareholder agreements.
Several years later, and without notice to Kaplan and Astle, Spocket’s board passed a resolution amending the right of first refusal, a step that required Mohebpour to exercise his powers of attorney on the former employees’ behalf. The amendments allowed Spocket to purchase employees’ stock option shares if a ‘triggering event’ occurred, including termination of employment.
Pursuant to the amendments, the board adopted a resolution approving the repurchase of Kaplan’s and Astle’s shares at a valuation date that preceded the actual repurchase date. Only then did Spocket give notice to the former employees.
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Spocket argued repurchasing the shares of former employees was consistent with commercial practice. But Justice Richard Fowler ruled there was no evidence of a valid commercial reason for changing company practices or that the amendments were in the best interests of the corporation.
As well, the amendments were “quite obviously a significant change to Spocket’s practices, made without notice to the petitioners,” said Fowler. This flew in the face of the former employees “reasonable expectations” that they wouldn’t be forcibly removed as shareholders and would be allowed to continue to participate in the corporation’s profits after they left the company.
“While the decision to repurchase shares of ex-employees taken alone may not have been unfairly prejudicial, the decision to do it without notice and at a valuation on a date many months before the repurchase date is unfairly prejudicial,” Fowler concluded.
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The former employees were entitled to compensation for the value of their shares on the date of repurchase, less what was actually paid. The upshot was an award of US$22,236 to Kaplan and $85,887 to Astle.
But Fowler declined to impose personal liability on the directors, noting there was no evidence they derived personal benefit from their actions or that they acted in bad faith, the “usual characteristics of conduct that attract personal liability.”
He also noted Spocket was a “closely held private company” where “the remedy of compensation paid by the company is sufficient to rectify the misconduct.”
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