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Dealing with the shareholder employee

It is not uncommon in smaller family run or closely held businesses to have a situation where a key employee is also a significant shareholder in the business. However, this can create significant issues if the relationship with the employee changes, particularly if the relationship deteriorates. This is because such employees are subject not only to employment laws, but also can take advantage of shareholder protections.

In particular, where the employment of the shareholder employee is a part of his or her legitimate expectations, it is not uncommon to see a wrongful dismissal suit bundled up with an oppression remedy suit.

The oppression remedy is a statutory remedy that exists in most Canadian jurisdictions. It is very broad and in essence protects the shareholder’s “reasonable expectations.” This can mean that if the shareholder employee established that he or she has a reasonable expectation of employment along with his or her shareholding, he or she may be able to claim that any such termination of his or her employment is not only a violation of the employment contract but also of his or her expectations as a shareholder. As such, trying to separate the shareholder employee from the business can mean dealing with two significant legal fronts.

Although the law is clear that the oppression remedy does not provide a remedy for employees per se (Warner v. Nova Scotia Textiles 2008 NSSC 17) there are numerous cases where the two concepts interrelate. For example, in the well known case of Naneff v. Con-crete Holdings Limited (1993), 11 D.L.R. (2d) 218 (Ontario Court of Justice– General Division) at paragraph 125:

As I have previously noted, a claim for wrongful dismissal is not, in itself, a proper claim to be asserted by way of oppression remedy. Where the dismissal is part of an overall pattern of oppression, and where the complainant’s position of employment is closely connected with his or her rights as a shareholder, officer and director of the company, or companies, in question, the dismissal may be properly considered as part of that pattern of conduct, however, in such a case, it seems to me, that some form of remedy for the wrongful act may be granted by way of “an order compensating the aggrieved person” under subsection 248(3)(j) of the OBCA [Ontario Business Corporations Act]. I intend to do so in the case of Alex [the Plaintiff].

The Court granted the Plaintiff approximately two years worth of compensation. This finding was affirmed by the Ontario Court of Appeal in (1995), 23 O.R. (3d) 481.

In conclusion, the shareholder employee, particularly in a small or closely held corporation, presents a set of unique challenges if the situation should arise that he or she needs to be separated from employment. Employers are advised to tread carefully in these circumstances.

Andrew D. Taillon
Cox & Palmer

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Andrew Taillon

Andrew Taillon was a lawyer in Cox & Palmer‘s Halifax office. He practiced mainly in labour, employment and litigation. Now he is a Barrister & Solicitor at Nova Scotia Department of Justice. Read more
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