When is payment triggered in the context of a Change in Control agreement

October 27, 2010

In the recent decision, Miranda v. Lake Shore Gold Corporation, the Ontario Court of Appeal held that in the context of a change of control agreement providing a CFO with a $175,200 payout if terminated "within six months of a change of control" the operative period for “within” was six months before or after the change of control.

Miranda became CFO of Lake Shore Gold Corp. on July 1, 2007.  At that time, he signed a “Change of Control Agreement” entitling him to a $175,200 payment if for any reason (other than dismissal for cause and one or two other minor exceptions) he should cease to be an officer of Lake Shore “within six months of the date on which control of the Corporation changes”.

On February 22, 2008, Lake Shore entered into a Strategic Alliance Agreement with Hochschild Mining Holdings Ltd. Under the agreement, Hochschild was to purchase Lake Shore stock in an amount that would give it control of the company.

Miranda was dismissed on April 14, 2008.  The change of control occurred on June 17, 2008, after the second of the two planned stock purchases was finalized. After the change of control, Miranda brought an application seeking a declaration that he was entitled to the $175,200, arguing that his April 14 dismissal fell “within six months” of the Change of Control date.

Application judge:

The application judge sided with Lake Shore, agreeing that “within” generally means “since or after” and that such an interpretation made sense in the context of a change of control agreement like this one – the purpose of which was to ensure continuity as a change of control takes effect.

Court of Appeal:

The Court of Appeal unanimously agreed that the application judge’s ruling was incorrect (correctness being the standard of review). In its view, the plain meaning of “X happens within six months of Y” is that X happens within a span of time beginning six months before Y and ending six months after Y. To put it another way, the “within six months” language did not require the two events – termination and change of control – to occur in any particular order.

Context of the agreement and commercial purpose

The Court noted, however, that its task “requires an examination of the words in the context of the entire Agreement and the shared intention or commercial purposes reflected therein.” Regarding the context of the agreement, the Court found that a determination of the time period in which the change of control might happen was not tied to a specific chronology of events. The Court examined another usage of the word “within” in the Agreement, and found that in both instances the occurrence of the two events did not need to be in a specific chronological order (i.e. the termination did not need to follow the change of control).
In terms of commercial purpose, the Court found that the purpose of such agreements is to ensure management (or employee) loyalty “during the time of uncertainty that arises during a period of change of control”. The Court stated that “[the] time of uncertainty does not just follow the change of control. It also includes the period during which the change is being brought about.
The Court found that Miranda should receive the $175,200 payment under the Change of Control Agreement, as his dismissal occurred “within” six months of the Change of Control.

Our Views:

The practical application of this case is to avoid use of the word “within” for drafting of employment (or any other) agreements, if there is any danger of producing an undesired ambiguity. If the intention is that payment only occur if the termination occurs after the change of control, a proposed solution is to add the word “following”, as in “within the six months following X”.

While it is important to remember that this case does not establish a one-size-fits-all meaning for “within” – the Court was clear that context and commercial realities will be considered – there is no reason to invite a problem that can so easily be averted.

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