The Ontario Court of Appeal has recently released an important decision dealing with the remedy available to an employee who also owns shares. In this case, the employee/shareholder was entitled to a share bonus upon termination under a Shareholder’s Agreement (SA). The employee was terminated at the end of October, and the bonus value of the shares was calculated by the employer at 30 days following termination, as set out in the SA. The employee brought a successful action for wrongful dismissal and was awarded 26 months’ notice.

The question became when the date of termination was to be set for the purposes of determining the ‘fair value’ of the shares. This required the court to determine whether the rights under the SA were to be impacted by the employee’s rights under civil law (i.e. whether the notice period should also be applied to the calculation of the share value, despite the SA stating otherwise).

The case is significant as it reversed the lower court decision in this matter.

Main Event

The essential issue before the court was whether there should be a distinction between the status of the plaintiff as an employee as opposed to a shareholder when it came to his various rights. That question became important as the SA allowed the employer the right to terminate certain shareholder benefits and status on short notice, a period much less substantial than that protected by the Employment Standards Act. Had the court agreed that the shareholder benefits were tied to employment and not purely as a shareholder, the limiting terms of the SA would fail and common law rights would prevail.

Court of First Instance

The original judgment found that the employee had been terminated without proper notice and had allowed compensation for a period of 26 months. The judge then applied the same notice period to the valuation of shares, rather than the 30 day time period set out in the SA. The employer objected to this determination and appealed the decision.

Court of Appeal’s Reasons

The Court of Appeal agreed with the employer’s submissions that a distinction must be drawn between the respondent’s rights as an employee and those as a shareholder. By deciding to apply common law awards to the shareholder entitlements, this Court concluded that:

[The lower court judge erred] by improperly conflating Mr. Mikelsteins’ entitlement to compensation arising from the breach of his contract of employment with Mr. Mikelsteins’ contractual entitlements respecting his shares. Mr. Mikelsteins received his shares pursuant to the Shareholders’ Agreement. It is the terms of the Shareholders’ Agreement that determine Mr. Mikelsteins’ rights with respect to those shares. The common law relating to compensation for breaches of a contract of employment does not apply to Mr. Mikelsteins’ entitlements regarding his shares.

There have been many prior decisions, including decisions of the Court of Appeal, allowing for common law claims for, in effect, shareholder entitlements. Those cases typically did not reflect a defined time period for a forced sale of the shares on termination, which as in this case, mandated the sale 30 days following termination.

The fundamental question became, are the rights as a shareholder determined by the status as an employee? 

To this issue, the appellate court found the necessary distinction between shareholder rights and employee rights. It was not persuaded by the seemingly attractive submission that one status surely led to the other in this employee-owned private company.

Hence the earlier judgment on this issue was reversed. It is not known presently if this decision ends the litigation as the leave period to appeal is 90 days and still running. We will be sure to follow any further updates.

Get Advice Before You Act

As demonstrated by the case at hand, employee rights can be complicated, particularly in a case where an employee is also a shareholder in the employer company. An experienced and knowledgable employment lawyer can provide practical preemptive advice to employers with the drafting of clear and concise employment contracts that leave no room for confusion.

If you have questions about this issue or any employment issue, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins LLP. We regularly advise employees and employers on issues in the workplace. Contact us online or by phone at 416-364-9599 to schedule a consultation.