Employee rights to shares on termination governed by shareholders’ agreement

In Mickelsteins v. Morrison Hershfield Limited 2019 ONCA 515 the Court of Appeal for Ontario decided that an employee’s right to purchase shares of his employer’s parent corporation under a shareholders’ agreement would be governed by that agreement, including upon termination of his employment.

The Court of Appeal emphasized that what an employee is entitled to under the terms of a contract is distinct from what the employee is entitled to at common law, and the two must not be conflated.

Background

Ivars Mickelsteins was employed by an engineering firm called Morrison Hershfield Limited for 31 years, most recently as director, business development, when on Oct. 26, 2017, he was terminated without cause and without notice.

Under the terms of the shareholders’ agreement, Mickelsteins was eligible to purchase shares of his employer, and he was also eligible to receive annual “share bonuses.” The share bonuses were effectively dividends calculated based on the company’s financial results, and an employee’s entitlement depended on the total number of shares held.

Article 3.2 of the shareholders’ agreement dealt with “Automatic Transfer Notices,” and applied in situations where a shareholder is terminated: 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 shareholders’ agreement also specified that when a shareholder is deemed to have given a transfer notice under Article 3, ownership of the shares is transferred back to the employer, and the employee is entitled to the “fair value” of their shares.

Mickelsteins did not receive a notice of termination from his employer; however, 30 days from the date of his termination, his employer repurchased his shares and paid him almost $1 million. Mickelsteins did not receive any share bonuses from the date of his termination.

Mickelsteins filed an action for wrongful dismissal and moved for summary judgment.

Decision of motion judge

The motion judge made determinations as to: (a) Mickelsteins’ wrongful dismissal claim; (b) the trigger date for the employer’s right to repurchase Mickelsteins’ shares and for the value he was entitled to be paid for them; and (c) Mickelsteins’ entitlement to a share bonus.
 
The motion judge awarded Mickelsteins damages for wrongful dismissal based on a 26-month notice period. He also concluded that Mickelsteins was entitled to receive payment for his shares with the value calculated at the end of the reasonable notice period and to receive the share bonus that would have accrued during the reasonable notice period.

The employer appealed the motion judge’s determinations relating to the value of Mickelsteins’ shares and the share bonus.

Decision of Court of Appeal

Calculation of the value of Mickelsteins’ shares: The court decided that the motion judge erred in concluding that Mikelsteins was entitled to compensation for his shares, as calculated at the end of the notice period, because that approach improperly conflated Mikelsteins’ entitlement to compensation arising from the breach of his contract of employment with his contractual entitlements respecting his shares. As Mickelsteins received his shares pursuant to the shareholders’ agreement, it was the terms of that agreement that determined his rights with respect to the shares. Accordingly, the trigger date for the fair valuation of Mickelsteins’ shares was the date on which his employment was terminated per Article 3 of the Shareholders’ Agreement, and not the end of his reasonable notice period.

The share bonus: The court noted that once ownership of the shares was transferred back to the employer, Mickelsteins was no longer entitled to the share bonus.

Bottom line for employers 

When an employer terminates an employee, the employer must remember that the employee may have two distinct sets of rights: rights at common law pursuant to the employment contract, and rights pursuant to the terms of any other contracts the employee and employer may have entered into. With regard to the latter contracts, their express terms apply to the employee’s entitlements under such contracts upon the employee’s termination and otherwise.

Employers will be reassured to know that, as was the case in Mickelsteins, when employees enter into a shareholders’ agreement with their employers, the employees’ rights with respect to their shares purchased under such agreements will be governed by their terms, both throughout the employment period and upon termination.

As knowledge management counsel for Littler LLP in Canada, Rhonda B. Levy is responsible for satisfying the firm’s Canadian knowledge management needs, for monitoring legislative, regulatory and case law developments and for drafting and editing publications. E-mail her at RLevy@Littler.com. Monty Verlint is a partner in the Toronto office of Littler LLP. Contact MVerlint@Littler.com or (647) 256-4506.

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