Rajah Lehal

In the eye of a Hurricane, there are quietly unexercised stock options

September 15, 2017

Links from this article:Hibberd v. Hurricane Hydrocarbons Ltd.Parol Evidence Rule

Co-authors: Brendan Sheehan and Rajah Lehal

Introduction

The case of Hibberd v. Hurricane Hydrocarbons Ltd. involved various issues regarding many stock options that were not exercised that were part of a consultant contract.

Facts

If you read through the 150 paragraphs of this case, you might find that the minutiae of details within the judgement are like the digressions on Targaryen history in Game of Thrones, interesting but not exactly necessary information. So I will summarize:

The defendants, Hurricane Hydrocarbons Ltd., had engaged the services of the plaintiff, Mr. Hibberd, and his company, for the purpose of raising capital for the defendant to purchase a company in Kazakhstan. As part of the agreement for the plaintiff’s services, in lieu of money they were verbally offered 100,000 stock options.

A written agreement came into effect for 50,000 with a termination clause that the option may be exercised any time until 60 days after his services are terminated, or before the options expire.

According to the plaintiff - the contractor - who signed off on these options, he was given representations that it was a standard clause and it wouldn’t be exercised.

The plaintiff entered into another agreement for 50,000 stock options that included a termination clause. It was the plaintiff’s understanding that the contract would not be terminated until after the options expired - and this was confirmed verbally, according to the contractor. Later, the defendant terminated the contract in question. The plaintiff did not exercise his options within the 60 days period of the termination, but he attempted to exercise the option months later.

What’s better evidence: a verbal or a written agreement?

The pleadings of the plaintiff relied upon the existence of oral (verbal) agreements that purported that the termination clauses did not matter. The plaintiff argued that there should be an exception to the parol evidence rule which requires that verbal agreements are enforceable, on the basis that the discussions between the parties represented a collateral agreement parallel to (and therefore not superceded by) the legal document.

The judge disagreed and refused to accept this oral evidence that contradicted the written agreement. Despite the plaintiff claiming that there was no commercial sense for him to enter into an option agreement that is tied to termination, the judge pointed out that the plaintiff still agreed to the written contracts even with the inclusion of such a clause. The judges stated that the consultant could have exercised the options over the course of the agreement, and actually had already exercised some of them.

Second attempt at securing options - Reasonable Notice for Termination

The plaintiff sought to argue there was no reasonable notice given for the termination of the contract. This would be directly related to when the plaintiff should have known to exercise his stock options. The judge does not believe the reasonable notice was required to be given because that is a concept existing exclusively in employment contracts. The judge ruled that this was not an employment relationship because both parties believed in the independence of the plaintiff.

Even though it was a long consulting relationship including very close at times, the court did not determine it was sufficient to be an employment contract.

Takeaways

  • If there is an important term that you want to include, get it into the contract. If there is a term that contradicts your understanding, take out your pen and strike out the offending term. I’ve been known to do that for clients in million dollar deals and for myself at car rental locations, and I find that the other party is almost always agreeable on sticking with the understood terms.
  • A written and signed contract can indicate that one of the parties agreed to a revised term under contract negotiations.
  • Reasonable notice required by employment law does not extend to a consultant contract. And - nor should it! Contractors have the flexibility to take many contracts and the need to provide little or no notice is a possible benefit that can extend both ways.
  • If the parties want the options to be held despite contract termination, the option grant should specify that. In the situation of contract termination, it may well be that the contractor did not fulfil their complete agreement and therefore, in that scenario, termination of either an employment or consulting agreement is a good trigger mechanism for terminating unvested or unexercised options.
Exercise of Options
Termination
Rights of Option Holders
Contract Negotiations
Expiry of Options
Case Law
Effects of Termination
Notice of Termination
Oral Representations
Choice of Law
Option Agreement

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.