Law Times

PAGE 12 FOCUS November 16, 2009 • Law Times times recently. Earlier this year, about 71 per cent of Fortune 500 companies had stock op- tions that were underwater, meaning that on average, the exercise price was higher than the current share price. While the market has recov- ered somewhat from its low point, Underwater stock options a conundrum for employers T BY JULIUS MELNITZER For Law Times he stock market, like the rest of the econo- my, has seen turbulent indications at press time were that the roller-coaster ride wasn't over. What is clear is that current share prices aren't likely to reach the stratospheric heights of the boom economy for some time. As a result, these conditions create a problem for public com- panies in terms of compensation. "Employees are uninspired by their equity compensation, institutional shareholders are unhappy about share values, and companies are somewhat handcuffed in remedying the situation because outstanding underwater or drowning op- tions count against shares re- served under an option plan," says Andrew MacDougall of Osler Hoskin & Harcourt LLP. In the past, backdating was a common ploy to deal with the situation. "But those days are over," says Jeff Goodman of Heenan Blaikie LLP. "One of the few options available is to give em- ployees more options in one form or another to compensate for the fact that they didn't profit from the previous ones." In the United States, more than 100 companies have ad- dressed the issue recently by re- pricing options. But in Canada, that's easier said than done. While the TSX doesn't re- quire shareholder approval for repricing programs unless insiders stand to benefit, Ca- nadian companies seem much more prone than their U.S. counterparts to encounter the wrath of investors. "There's a much stronger an- tipathy to repricing stock op- tions here than there is among shareholder activists in the U.S.," says Christina Medland of Torys LLP. Many powerful Canadian in- stitutional investors are opposed to repricing. The Ontario Mu- nicipal Employees Retirement System's proxy voting guidelines, for example, state that the fund will vigorously oppose altering stock options in any way when prices fall. The Ontario Teach- ers' Pension Plan and the Can- ada Pension Plan Investment Board have similar policies. "The general rationale that these groups give for opposing option repricing is that the pur- pose of an option grant is to create an alignment of interest between shareholders and management, and a repricing destroys that alignment by giving management a fresh start that shareholders cannot get," Medland explains. So far, then, repricings have been rare in Canada. "The few examples I've seen ADVISE YOUR CLIENTS NEW TITLE EMPLOYEE AND PENSION CLAIMS DURING COMPANY INSOLVENCY: A COMPARATIVE STUDY OF 62 JURISDICTIONS DR. JANIS P. SARRA Use this text to challenge the status quo, to compare and contrast one system to another in order to frame an argument of why wages and pensions should be treated differently in your country. This book is divided into parts that are designed to provide the most detailed account of world insolvency systems and how they treat wages and benefits of employees. ORDER # 981737-66341 $100 Softcover October 2008 approx. 340 pages 978-0-7798-1737-5 THE ANNOTATED EMPLOYMENT INSURANCE ACT AND REGULATIONS T. STEPHEN LAVENDER This text includes a fully annotated version of the current Employment Insurance Act together with a thoroughly revised and updated set of the most relevant and useful case annotations for counsel and agents acting in proceedings before Umpires under the Act. It also includes the full text of key court and Canadian Umpire Benefits (CUBs) decisions determined under the various sections of the Act. ORDER # 9284231-66341 $200 2 volume looseleaf supplemented book 2-3 supplements per year Supplements invoiced separately 0-459-28423-1 ON THE LAWS OF THE WORKPLACE THE EMPLOYMENT AND LABOUR LAW COLLECTION EMPLOYMENT LAW MANUAL: WRONGFUL DISMISSAL, HUMAN RIGHTS AND EMPLOYMENT STANDARDS THE HONOURABLE MR. JUSTICE JOHN R. SPROAT In addition to an extensive treatment of wrongful dismissal, this work features an examination of discriminatory practices under the Ontario Human Rights Code and offences under the Employment Standards Act, 2000. It includes a section offering practical advice on hiring and firing that is supplemented by a collection of helpful precedents, featuring forms of employment contracts, warning letters, termination letters, and more. ORDER # 9340417-66341 $375 3 volume looseleaf supplemented book 6-7 supplements per year Supplements invoiced separately 0-459-34041-7 NEW EDITION WRONGFUL DISMISSAL HANDBOOK, 5TH EDITION THE HONOURABLE MR. JUSTICE JOHN R. SPROAT This practical handbook includes commentary and analysis on topics including: the employment contract, what constitutes just cause for dismissal, constructive dismissal, harassment in the workplace, mitigation of damages, tort liability, and termination payments. ORDER # 982159-66341 $121 Softcover June 2009 approx. 1,100 pages 978-0-7798-2159-4 NEW EDITON AGENCY LAW PRIMER, 4TH EDITION CAMERON HARVEY AND DARCY MACPHERSON This publication provides a complete selection of topics, case and statute references relevant to Canadian agency law, plus a compendium of reasons for the most important cases. Topics featured include apparent authority and corporate principals, and termination. ORDER # 981902-66341 $105 Softcover March 2009 approx. 350 pages 978-0-7798-1902-7 REMEDIES IN LABOUR, EMPLOYMENT AND HUMAN RIGHTS LAW EDITOR: JAMES T. CASEY CO-EDITOR: AYLA AKGUNGOR This unique resource provides a comprehensive analysis of the remedial jurisdiction of adjudicators, tribunals and courts to enforce human and employment rights. The authors examine remedies arising from labour arbitration, from wrongful dismissal litigation, and from unjust dismissal cases under the Canada Labour Code, following labour relations board hearings and in the human rights context. In each instance the authors discuss the purpose and scope of the available remedial orders as well as the source of the remedial authority, then each type of remedial order is detailed and explored. ORDER # 9239090-66341 $303 1 volume looseleaf supplemented book 2-3 supplements per year Supplements invoiced separately 0-459-23909-0 AVAILABLE FOR 30 DAYS, RISK FREE Call Toll-Free: 1-800-387-5164 In Toronto: 416-609-3800 One Corporate Plaza, 2075 Kennedy Road, Toronto Ontario Canada M1T 3V4 | carswell.com | thomsonreuters.com 12672-A12272-66341 MM1 10/09 of companies repricing without shareholder approval have been issuers on the TSX Venture Ex- change," MacDougall says. Aggravating the conundrum is the tax treatment that op- tions receive. "Of all the ways of compen- sating people, options are the best from a tax perspective," says Dov Begun, another Oslers partner. At the same time, in this econ- omy, cash compensation is hardly a preferred alternative. "Most companies don't have a lot of cash for bonus plans," Medland says. But what may be more ap- pealing to all stakeholders than a cash bonus or a straight repricing is exchanging the existing options for a smaller number of new ones at a lower exercise price. That's a route various issuers in the Unit- ed States, including Starbucks Corp., have proposed recently. "Because there's no additional cost to the employee for the ex- change, the new options have value no matter where the stock price goes unless the company goes bankrupt," MacDougall notes. "And because each option- ee receives fewer stock options than were cancelled, the number of outstanding options decreases, thereby reducing the company's stock-option overhang, which is a measurement used to determine the dilutive effect of options." Nevertheless, decreased val- ues do have a bright side for some in the wrongful dismissal world. "There tends to be a great deal less litigation from ter- minated employees trying to realize the value of the stock when the stock is underwater," says Jennifer Fantini of Borden Ladner Gervais LLP. Still, underwater options do raise issues when wrongful dis- missal litigation does occur. "On the one hand, you'll have the employer arguing that the option has no value and the employee arguing that it will have better value in the future," Fantini says. LT Untitled-1 1 www.lawtimesnews.com 11/10/09 10:32:23 AM

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