On September 17, 2020, the Ontario Court of Appeal overturned the decision of a applications judge who declined to award a "change of control" payment to an officer of a corporation terminated prior to the change on control.
The agreement between the officer (CFO) and the corporation contained the following provision:
In the event the Officer ceases to be an officer of the Corporation for any reason within six months of the date on which control of the Corporation changes (which event is called “Change of Control”), the Corporation shall pay to the Officer $175,200 (the “Change of Control Payment”).
This is fairly typical language in these agreements.
There was a second provision ("paragraph 2") which, as it turns out, was highly material to the outcome of the case:
Notwithstanding paragraph 1, Change of Control does not include removal of the Officer as an officer of the Corporation for cause. This Agreement shall terminate immediately upon a voluntary resignation of the Officer as an officer of the Corporation unless a Change of Control occurred first.
The thing is that the CFO was terminated on on April 14, 2008 and the applications judge determined that the change of control took place on June 17, 2008, some 2 months after the termination. The applications judge considered the word "within" in the above-quoted clause to mean the six months since or after the date of change of control and decided that the clause did not apply and the payments were not required (truth be told, that's how I would have interpreted the clause).
The general purpose of these change of control provisions was reviewed in Montreal Trust Co. Of Canada v. Call-Net Enterprises Inc. where the Court of Appeal agreed with the following statement of the trial judge:
A Change of Control Agreement is thus a protective mechanism for both the corporation and the executive and has a legitimate business purpose. It is intended to retain executives and ensure their loyalty to the corporation in a time of uncertainty. It offers financial security to an executive who is either terminated or resigns after a change in control. As it has the potential to cause substantial financial exposure for a corporation, it must be entered into with the best interests of the corporation in mind. Otherwise, it has no legitimate corporate or business purpose. [Emphasis added.]
The Court of Appeal disagreed with the applications judge and held:
These words describe two events, namely ceasing to be an officer of Lake Shore, and change of control of the company. These events must occur within a period of six months as a precondition to Miranda’s entitlement. Nothing in the nature of the events themselves suggests that the change of control must precede ceasing to be an officer. The change of control need not cause the individual to cease being an officer. The Agreement contemplates that this can happen “for any reason”. Requiring that one event occur “within six months of” the other simply means that no more than six months can separate them. In other words, they must occur within six months of each other.
Accordingly, the fact that the officer was terminated prior to the change in control did not prevent the payment under the contract. The Court found support in paragraph 2, quoted above:
However the parties have expressly addressed the situation in which the cessation precedes the change of control and have explicitly provided that cessation by way of voluntary resignation does not attract the payment. By implication, cessation as an officer through termination in the six months preceding change of control (ie. what happened here) is covered by the Agreement and triggers the right to payment.
What came first the chicken or the egg? In this case, it didn't matter. I confess that I am struggling with the Court of Appeal's decision.
In light of this decision, it would be wise to define with precision the timing of the change of control and whether a pre-change in control termination will trigger the payment under the contract. While, I suspect, most people would likely have not thought that this was required, this case suggests otherwise.