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The Ontario Court of Appeal has confirmed that stock options and other equity-based arrangements will not automatically be treated as employment compensation or as a term or condition of employment. Rather, the analysis remains highly dependent on the specific agreements and surrounding circumstances.
In Friel v. HUB International Limited, the Court of Appeal made clear that it will give effect to the parties’ intentions, as reflected in the language of the relevant agreements and the surrounding circumstances, and will enforce clear contractual terms in equity agreements without importing employment standards where the facts do not support doing so.
The decision provides an important counterpoint to Wigdor v. Facebook, in which the Court of Appeal held that the restricted stock units (the “RSUs”) granted to Dr. Wigdor following Meta’s acquisition of his company formed part of his employment compensation package and were therefore protected as part of his “terms and conditions of employment.”
Background: Friel v. HUB International Limited
Mr. Friel was a former employee of HUB Ontario. His employment agreement was governed by Ontario law and contained an ADR clause that applied to disputes arising under that agreement (the “Employment Agreement”).
During his employment, Mr. Friel entered into an agreement with Hockey Parent Holdings L.P. (“HPH”), the parent company of his former employer, to purchase Class A units in HPH. That agreement incorporated an Equityholders Agreement.
He was later granted an option by Hockey Parent Inc. (“HPI”), another HPH subsidiary, to purchase Class B shares in HPI, with the options vesting and becoming exercisable on December 22, 2021 (the “Option Agreement”). The Option Agreement also incorporated the Equityholders Agreement.
The Equityholders Agreement contained a forum selection clause designating the Delaware Court as the forum for resolving disputes. Although Mr. Friel did not sign the Equityholders Agreement, he did not dispute that it had been made available to him before he signed the Option Agreement.
The dispute over the vested options
Mr. Friel resigned from HUB Ontario one day after the Class B options vested and began working for a competitor. He then gave notice of his intention to exercise his vested options in HPI and acquire Class B shares under the Option Agreement.
In response, the respondents, HUB International Limited, HPH and HPI, advised Mr. Friel that, although they did not dispute that the options had vested or that he was entitled to exercise them, his employment with a competitor constituted “misconduct” under the Equityholders Agreement. As a result, if Mr. Friel acquired the shares, pursuant to the Equityholders Agreement, the respondents would be entitled to repurchase them at cost, with any value forfeited.
Mr. Friel commenced an application in the Ontario Superior Court of Justice, where he sought the following:
- a declaration that the dispute was governed by the ADR clause in his Employment Agreement;
- an order appointing an arbitrator; and
- a declaration that the forum selection clause in the Equityholders Agreement was unconscionable.
The application judge determined that the ADR clause did not apply to the options dispute and that the forum selection clause in the Equityholders Agreement was valid and enforceable, giving the Delaware Court jurisdiction over the dispute.
The Court of Appeal’s analysis and decision
The issue on appeal was whether the application judge erred in determining that the proper forum for the resolution of the dispute is the Delaware Court, rather than arbitration pursuant to the ADR clause in the Employment Agreement.
Mr. Friel made three arguments in support of his position, all of which were rejected by the Court of Appeal.
Competence-competence principle did not prevent judicial assessment
First, Mr. Friel argued that determining the proper forum required more than a superficial review of the record and therefore should have been left to the arbitrator under the competence-competence principle. The Court rejected that submission and upheld the application judge’s conclusion that an exception to the competence-competence principle applied. That exception permits a court to determine jurisdiction where resolving arbitral jurisdiction involves questions of mixed fact and law.
The Option Agreement was not “inextricably linked” to the Employment Agreement
Second, Mr. Friel argued that the motion judge erred in concluding that the dispute was not sufficiently connected to his employment, asserting that the Option Agreement was “inextricably linked” to it. The Court rejected that argument as well. It held that the application judge did not err in interpreting the relevant provisions and was correct to conclude that the ADR clause in the Employment Agreement did not govern the dispute. In particular, the Option Agreement stated that the grant of options did not constitute employment compensation, was not a term or condition of employment, and did not form part of the Employment Agreement.
The forum selection clause was not unconscionable
Third, Mr. Friel argued that the forum selection clause in the Equityholders Agreement was unconscionable because of the inequality of bargaining power between him and his employer. Notably, in advancing this argument, the applicant appeared to conflate the test to enforce an arbitration clause with the test to enforce a forum selection clause.
In any event, the Court rejected the applicant’s submission, agreeing with the application judge that the authorities on which Mr. Friel relied, including Uber Technologies Inc. v. Heller, 2020 SCC 16, and Rose v. Carnival Corporation, 2022 ONSC 6506, were distinguishable: the bargain was not improvident and there was no evidence that the forum selection clause would place a remedy beyond Mr. Friel’s reach.
Key takeaways
Equity arrangements are not automatically terms or conditions of employment. Just because an employee has an options agreement or equity-based arrangement (in addition to an employment agreement), it does not necessarily follow that the arrangement will be treated as employment compensation or as a term or condition of employment. The analysis remains highly dependent on the specific agreements and surrounding circumstances.
Clearly drafted forum selection clauses can be enforced. Where there is a valid and applicable forum selection clause, the applicant must show “strong cause” that the clause should not be enforced. Relevant considerations include:
- fairness and convenience;
- the interests of justice; and
- public policy concerns.
When those concerns are absent, courts are willing to enforce the parties’ chosen forum.
McCarthy Tétrault has extensive experience drafting equity agreements in labour and employment matters, and in domestic and international arbitration and representing parties in disputes involving these agreements. If you have questions about this decision, equity compensation, arbitration clauses, forum selection clauses or appellate issues arising in arbitration proceedings, please contact a member of our team.
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