Fuller v. Aphria Update: A “Fuller” Picture on Stock Options
The Ontario Court of Appeal adds to the interpretation of inter-related contracts
Jon-Paul Fuller was one of three founders of Aphria (now with a market cap of over $1 billion). In 2014, as a result of his work for Aphria under a consulting agreement, Fuller was granted 200,000 options to purchase shares in Aphria at $0.60 per share.
Aphria’s option plan, subsequently implemented, provided that options would expire six months after the holder was no longer an “eligible person”, a term that included directors, officers, employees, and consultants of Aphria. Fuller ceased to be an eligible person following the termination of his consulting agreement in 2016, two and half years after the option grant. However, the consulting agreement along with a stock option agreement under which the options were issued to Fuller provided that the options could be exercised for a period of five years after the option grant, which would put the expiry date in 2019.
In December of 2017, Fuller attempted to exercise the options. Aphria rejected this exercise on the basis that Fuller was out of time to do so by virtue of no longer qualifying as an “eligible person” under the option plan.
So Fuller went to court, claiming the options terminated in 2019 (as per the consulting agreement and the stock option agreement), not in 2016 (as per the stock option plan). But the application judge found that the options had expired 6 months after the consulting agreement terminated (which was in December 2016, a year before Fuller attempted to exercise the options). Not only did Fuller get nothing for his options – he was also ordered to pay Aphria $75,000 in costs. For a “fuller” summary of the application judge’s original decision, see SkyLaw’s blog “Fuller v. Aphria: Diamonds are forever. Options aren’t!”
Last week, the Ontario Court of Appeal released its decision related to this case whereby it allowed the appeal and found in favour of Fuller. This appeal provides helpful insight into the importance of option exercise periods and the way in which the court will interpret the terms of inter-related contracts.
Justice Zarnett of the Court of Appeal agreed with the application judge and both parties that the option plan had been incorporated by reference into the consulting agreement and stock option agreement. This incorporation meant that all three contracts must be interpreted in light of one another. However, Justice Zarnett also found that “the application judge made errors of law that tainted the conclusion he reached, resulting in an interpretation that is inconsistent with the wording of the relevant agreements.”
At the heart of this case was the inconsistent exercise periods relating to Fuller’s options. Justice Zarnett found that where there is an apparent conflict between general terms and specific terms in inter-related contracts, the terms may be reconciled by taking parties to have intended the scope of the general term not to extend to the subject matter of the specific term.
While the option plan provided for a six-month termination period once an option holder ceased to be an eligible person, Justice Zarnett concluded that this period was not applicable. He found that the option plan’s terms provided for and gave priority to exercise periods that were different from those in the termination provision.
Justice Zarnett went on to say that the application judge failed to consider all the terms of the grant of options and the periods for exercising them under the option plan itself and “he failed to properly consider that the Consulting Agreement contained a comprehensive code as to when the exercise period would be shortened from its five-year term.” The consulting agreement was always to terminate after two years. The five year expiry date of options set by the consulting agreement created an exercise period that was inconsistent with the termination provisions of the option plan, but since the termination of the consulting agreement was certain, those termination provisions could never have been meant to apply to the exercise of these options. This was confirmed, Justice Zarnett stated, by the stock option agreement which provided that the options could be exercised up to the expiry date in 2019.
While the consulting agreement and stock option agreement were “subject to” the option plan, this did not answer the question of whether they would be subject to the termination provisions of the option plan. The option plan was of general application to the options issued to Fuller and many of its terms were relevant. Importantly though, the terms of the grant of options under the consulting agreement, and confirmed in the stock option agreement, were specific about the exercise period applying to these options and about the exact and only event that would shorten it.
Thus, the appeal was allowed and an order was made for Aphria to pay an amount of $2,820,000 plus Fuller’s costs.
Key Contractual Interpretation Principles
Justice Zarnett drew attention to a number of key contractual interpretation principles in his analysis of the three inter-related contracts in this case. These were:
- “A bedrock principle of contractual interpretation” is that a contract’s text is to be read “as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective”.
- Where terms of a contract are actually inconsistent, “in the sense that there is no proper interpretation which can reconcile them, a court may have to rule the ‘repugnant’ term ineffective”. However, he qualified this as a rule of last resort.
- Where there is a conflict between a general term and a specific term, the terms may be reconciled by taking the parties to have intended the scope of the general term not to extend to the subject-matter of the specific term.
- An interpretive approach that views the terms of a “host” contract as a better reflection of the specific parties’ intent than an apparently inconsistent term incorporated by reference, may be appropriate in cases where the incorporation by reference is effected by language that does not give the incorporated terms priority.
The Court of Appeal’s decision sets out important guidance on how to interpret inter-related contracts with inconsistent terms. It’s still true that missing the deadline to exercise options could be costly, but it can be even more costly when it isn’t clear from the agreements what that deadline actually is. If in doubt, spell it out.
Many points from our previous blog remain important. You should still:
- Read the Option Plan and all related contracts;
- Keep track of key dates;
- Speak with a lawyer and tax advisor; and
- Make vesting conditions and termination events clear – Given the Court of Appeal’s decision, this may be more important than ever. It should be clear to everyone (both the corporation issuing the options and the option holder) under what conditions options will vest and terminate.