Employee Share Entitlements On Termination: A Matter Of Contract
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In a recent decision, Mikelsteins v Morrison Hershfield Limited, 2019 ONCA 515, the Ontario Court of Appeal reversed the lower court’s ruling that a former employee was entitled to the increase in the value of shares held in the parent corporation, along with a share bonus – effectively dividend payments – accrued during the reasonable notice period. The Court of Appeal held that common law principles with respect to compensation in wrongful dismissal cases did not apply to the employee’s share entitlements – which it found to be governed exclusively by the Shareholders’ Agreement in question.
Lower Court Decision
Under the terms of the Shareholders’ Agreement, a Transfer Notice in respect of an employee’s shareholding is deemed to have been triggered, at fair market value, 30 days from the date that the employee is notified of termination of employment. However, in a ruling now held to be contrary to the terms of the Shareholders’ Agreement, the motion judge found that the plaintiff, Mr. Mikelsteins, was entitled to receive payment for his shares based on their value, not 30 days after termination of his employment, but at the end of a 26-month reasonable notice period, as well as any share bonus payments accrued during this period.
In reaching this conclusion, the motion judge relied on the principle set out in the 2016 Ontario Court of Appeal decision, Paquette v. TeraGo Networks Inc., which maintains that, in cases of wrongful dismissal, a terminated employee should be placed in the same financial position he or she would have been in had proper notice been given.
The Court of Appeal, however, thought otherwise. It found that the employee’s share entitlements were, in fact, specifically governed by the terms and conditions of the relevant Shareholders’ Agreement. The Court ruled that it was the terms of this Agreement, and not common law principles, which applied. It emphasized that there is an important distinction between an employee’s entitlement to compensation arising from the breach of a contract of employment, and the employee’s contractual entitlements in respect of share ownership: the former being governed by common law principles, and the latter by the terms of the Share Agreement. Furthermore, in stating that the two entitlements should not be conflated, which it suggested the lower court had done, the Court of Appeal also emphasized that the terms of the Share Agreement would exclusively apply in regard to contractual entitlements in the case of share ownership, irrespective of whether an employee had been terminated with or without cause.
The Court of Appeal also addressed an argument by the respondent, Mr. Mikelsteins, to the effect that the Shareholders’ Agreement violated section 60(1)(a) of the Employment Standards Act, which prohibits reducing an employee’s wage rate or altering any other term or condition of employment during a notice period. The Court viewed this as another instance of conflation error. It held that the Employment Standards Act did not apply, and to seek to make it relevant in this manner was again to wrongly engage in “the conflating of Mr. Mikelsteins’ rights under his contract of employment regarding entitlement to reasonable notice, and his rights under the Shareholders’ Agreement regarding his shares, and treating them as one and the same.”
This decision provides additional certainty for employers – and employees – that, upon termination, share entitlements will be governed exclusively by the contractual terms and conditions set out in the Shareholders’ Agreement, and not by common law principles applicable in employment termination cases. For greater certainty, and to reduce the potential for costly litigation, it may be advisable that future Shareholder Agreements contain specific language that make this abundantly clear.
Author - Extraordinary Damages in Canadian Employment Law