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Ontario Court of Appeal: Upon termination, employee’s shareholder rights distinct from common law entitlements

shareholder agreement
Image: Jeroen van Oostrom | FreeDigitalPhotos.net

Overview

In Mikelsteins v Morrison Hershfield Limited[1], the Ontario Court of Appeal held that an employee was not entitled to compensation over his common law notice period in connection with shares he had purchased under a shareholders agreement.

The Court held that a motion judge’s prior decision (which extended the employee’s shareholder rights over a 26-month notice period) had improperly conflated the employee’s entitlement to compensation arising from the breach of his employment agreement with his specific contractual entitlements under the shareholders agreement.

In allowing the appeal, the Court found that the terms of the shareholders agreement determined the employee’s rights concerning compensation for his shares – and this entitlement was distinct from his common law termination entitlements.

Background

This case concerned a senior executive with 31 years of service who was dismissed on a without cause basis. Prior to the termination of his employment, the employee had purchased shares under the employer’s shareholders agreement.

There were two terms of the shareholders agreement that were significant in this case:

  1. Shareholders were eligible to receive a share bonus (which was essentially a dividend determined by the company’s financial success – not by an employee’s performance).
  2. Termination of employment triggered the employer’s right to repurchase the shares. A shareholder is “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”, and is entitled to “fair value” for the share sale.

The employer followed the terms of the shareholders agreement in respect of the employee’s share entitlements. Thirty days following the termination date, the employer exercised its right to repurchase the shares, and he was paid nearly $1M.

The employee commenced a wrongful dismissal action, and then brought a motion for summary judgment. The motion judge awarded the employee 26 months’ pay in lieu of notice. In particular, the motion judge held that the employee was entitled to the following: (i) to hold his shares until the end of the notice period – with the value of the shares calculated at the end of notice period, and (ii) to receive damages for the loss of share bonuses that would have been payable over the 26 months. In coming to this decision, among other things, the motion judge followed Paquette v. TeraGo Networks Inc.[2], and found that the shareholders agreement lacked clear language ousting the employees share-related entitlements during the reasonable notice period.

Appeal

The Ontario Court of Appeal reversed the motion judge’s award concerning the employee’s share-related entitlements.

The Court found that common law principles were not applicable to the interpretation of the shareholders agreement. The employee’s common law entitlements to compensation arising from the breach of his employment agreement were separate and distinct from entitlements under “the terms of more specific contracts” like the shareholders agreement.

The Court offered some reasons on why these entitlements were distinct: in contrast to an employment agreement, the shareholders agreement was a “take it or leave it” form of contract – employees who were invited to participate had no ability to negotiate the terms (and therefore the surrounding facts played less of a role in its interpretation). Further, the interpretation of the shareholders agreement had wider implications for both current and future shareholders, and therefore it should be interpreted consistently. Ultimately, the Court found that the terms of the shareholders agreement determined the employee’s rights concerning compensation for his shares – and therefore, the employer’s right to repurchase the employee’s shares was triggered on the termination of his employment.

Of note, the Court also addressed an alternative argument that the shareholders agreement was in breach of the Employment Standards Act, 2000 (on the basis that the ESA prohibits employers from altering a terminated employee’s pay or benefits during the statutory notice period). The Court stated that this argument again conflated the employee’s rights under his employment agreement, and his rights under the shareholders agreement. The Court held that the shareholders agreement did not alter any term or condition of employment, and the ESA had no application in respect of the employee’s share entitlements.

Commentary

This case demonstrates that an employee’s statutory and common law entitlements arising from the termination of his employment agreement can be separate and distinct from his contractual entitlements under a shareholders agreement. Mikelsteins v Morrison Hershfield Limited helps to clarify limits on the applicability of common law principles to more specific contracts, such a shareholders agreement – provided the language of the shareholders agreement is clear and contemplates a shareholder’s entitlements following the termination of employment.

By Patrick Pengelly


[1] 2019 ONCA 515.

[2] 2016 ONCA 618.

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Employer Advisor, McCarthy Tétrault LLP

Employment and labour lawyers at McCarthy Tétrault LLP
McCarthy Tétrault through their Employer Advisor blogs offers their perspectives on the latest legal developments applicable to the workplace. It provides their insights on legislative and regulatory developments, as well as new case law, while providing practical tips for employers and their human resources professionals when managing the workforce. McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally. Several of their blog posts will be republished with permission on First Reference Talks. Read more
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