In the company’s articles, explicitly provide which class of shares is to be issued under the Employee Stock Option Plan (ESOP). Also, ensure that redemption rules for all classes of shares are clearly stipulated.
In Smith v. Centra Windows Ltd., 2009 BCSC 606 (CanLII) (Smith v. Centra) the unclear stipulation of the above issues caused Centra Windows Ltd. (Centra) a law suit.
Although the case was held in favor of Centra, the matter may have been avoided with clear stipulations in their company articles.
In Smith v. Centra, Mr. Smith, who used to work for Centra, was issued 67,200 common shares (30,200 Class A shares and 37,000 Class B shares). After Mr. Smith’s termination, an issue arose regarding the redemption of Class A shares. Although the ESOP contained redemption provisions which permitted the employee to sell the shares to a third party or seek redemption from the company, there was no provision requiring a shareholder to tender shares upon termination.
However, in the Centra’s articles, it was stated that Class B shares issued under the ESOP were to be redeemed by the company if the worker was no longer an employee with Centra.
The articles did not address Class A shares at the time of Mr. Smith’s termination. Amendments were made to the articles after Mr. Smith’s termination. The court held that this amendment was not done in bad faith. Rather, the operating assumption was to treat Class A and Class B shares similarly. The difference was not noticed until Mr. Smith’s termination. At this time, the company rightly amended its articles.
Furthermore, it was apparent that Class A and Class B shares were treated similarly when other employees left Centra. Mr. Smith would have been aware of this because he was a part of the inner management team at Centra.
Therefore, he should have known that all of his shares were subject to redemption like in the manner set out for Class B shares.
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Rajah Lehal: Rajah is the Founder and CEO of clausehound.com. Rajah received his M.B.A. and J.D. degrees, from the University of Western Ontario Richard Ivey School of Business and the Faculty of Law respectively, during which time he was Co-President of Entrepreneurs@Ivey, a student-run entrepreneurship group and, as well, assisted Professor Richard McLaren with the launch of the Western Business Law Clinic. Rajah also received an Honours Philosophy degree from the University of Waterloo, where he also took a significant course load in Mathematics and Computer Science. Rajah worked for more than a decade in the information technology industry, including three years in software development and seven years as an Information Systems and Technology manager at both a major telecommunications company and at a financial services company. Rajah also received his legal training in the corporate law group at Stikeman Elliott LLP in Toronto, as well as internationally for the Technology Media and Telecom group in the Dubai office of Clyde & Co. Rajah is a Technology and Small Business Lawyer and is counsel for the Venture Law Practice Group at Cobalt Business Counsel, a corporate and securities law practice based in Toronto. Recently, Rajah has been interviewed for a Financial Post podcast and by the Globe and Mail for his work at Multiplicity, and has joined the Loan Review Committee Member for the CYBF Spin Master Innovation Fund and was asked to judge the Ivey IBK Business Plan Competition. Rajah is also on the board of directors of Sky’s the Limit charity that provides laptops to youths in need and is Canadian Responsible Leaders Chapter Head for the BMW Foundation. Rajah continues to be an active member in the start-up technology industry nationally and internationally.