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OCA distinguishes employee rights v shareholder rights

shareholder rights

In Mikelsteins v Morrison Herschfield Ltd. (2019 ONCA 515) the Court of Appeal revised a trial decision where an executive was given 26 months notice. The Plaintiff, in addition to his salary, was a shareholder in this private company and as such received dividends from time to time. The Shareholders Agreement also had a section which said as follows:

A Shareholder whose association with the Corporation and its Affiliates ceases by reason of termination by the Corporation of his/her employment with the Corporation and its Affiliates shall, immediately after such termination, be deemed to have given a Transfer Notice covering all of the Shares held by him/her on a date which is 30 days from the date he/she is notified of such termination by the Corporation.

The trial judge interpreted this clause to mean that the “termination of his employment” had to mean his lawful termination, in other words at the end of the 26 month notice period.

The Court of Appeal disagreed. They said that it was an error of law to incorporate a common law employment analysis to a corporate document like a Shareholders Agreement.

      With respect, contractual rights differ from common law rights. Contractual rights depend on the terms of the contract to which the parties have agreed. The principle enunciated in Love, and reiterated in Evans, is that there is a difference between what a dismissed employee is entitled to as damages in lieu of notice upon termination of the employment contract and what the employee is entitled to under the terms of more specific contracts.

What is the policy reason referred to by the Court  for this distinction?

Similarly here, the Shareholders’ Agreement uses the cessation of Mr. Mikelsteins’ employment as the triggering event for the process to transfer his shares. The termination occurred on October 26, 2017. There is a very plain and obvious reason why a corporation, that is employee owned, and which has terminated an employee who also happens to be a shareholder, would wish to commence the process of repurchasing the employee’s shares the moment that employee is told of his or her dismissal, rather than at the end of the notice period. Understandably the corporation would not wish an employee to be able to exercise all of the rights of a shareholder once their employment is terminated.

This case follows another Court of Appeal case called Love v Acuity Investment Management, (2011 ONCA 130) in which a share repurchase agreement was interpreted the same way.

My Comments:

The policy reason set out by the Court seems odd. Of course the Company, aka the Employer, would want to avoid paying dividends to an employee they illegally fired. So what? Why not ask what the the shareholder, aka the employee, would like?

Since when is what one party likes a ground for interpreting a contract?

Since the plaintiff’s entitlement to even be a shareholder was tied to him being an employee, why make this artificial distinction between common law employment rights and contractual rights?

Why do contractual rights override common law rights?

It seems that if instead of being a shareholder per se, the plaintiff had a a provision in his employment contract that his bonus would equal the dividend paid to shareholders, the Court would have allowed him to receive dividends throughout the notice period.

It is important to note that both in  this case and in Love that the employees were shareholder in privately held companies, not publicly traded ones.

Perhaps I could suggest a different rationale for why Courts seem to treat these cases of repurchase agreements differently than the employee owning stock options in public companies type of cases where it is clear that the termination date is the lawful termination date, not the actual date.

  1. Private companies require certainty in who the owners are at any given time more than public companies. If the repurchase date were at the end of the notice period then no repurchase could take place until a Court determined that date. This could take years and what shareholder rights would the dismissed employee have during that time? The interests of a current employee/ shareholder are vastly different than those an ex-employee/ soon to not be an ex-shareholder.
  2. If the share price fluctuated wildly after the actual termination, then each party would argue the notice period that happened to favour their desired stock price. For example, if 3 months after termination the price dropped and continued to drop for the next 9 month, the plaintiff would argue the notice period was 2 months and the employee would say that the proper notice period was 12 months.

This case reminds me why I used to tell my plaintiff clients not to be enthralled with the idea of being a minority shareholder of their employer. If you want a share of the profits, negotiate a profit sharing arrangement without the necessity of actually being a minority shareholder.

This case accentuates the advantage of being an employee over being a powerless minority shareholder.

Barry B. Fisher LL.B.

Barry B. Fisher, LL.B., is a mediator and arbitrator of both employment and labour relations matters. He offers three forms of ADR based on clients’ needs: Mediation, Arbitration and Med/Arb. Barry is from the evaluative school of mediation and brings his over 30 years' experience as an employment lawyer and legal author to the dispute. In addition to his knowledge of the legal issues involved in these disputes, he also has a deep understanding of the psychological factors that motivate both employees and employers. By combining these two skills, Barry is able to achieve a settlement rate of over 80% of the disputes that he mediates.
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