Update 2: On March 12, 2021, in Mikelsteins v. Morrison Hershfield Limited, 2021 ONCA 155, the OCA decided that the decision of the Supreme Court of Canada in David Mathews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 (Ocean Nutrition) did not change the proper analysis to be applied to the issues raised on the appeal, and it affirmed its earlier appeal decision in Mikelsteins v. Morrison Hershfield Limited, 2019 ONCA 515.  We wrote about Ocean Nutrition here. 

Update 1: On November 19, 2020, the application for leave to appeal the decision of the Ontario Court of Appeal (OCA), Mikelsteins v. Morrison Hershfield Limited, 2019 ONCA 515, to the Supreme Court of Canada (SCC) was remanded by the SCC to the OCA for disposition in accordance with David Mathews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, which we wrote about here. 

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In Mikelsteins v. Morrison Hershfield Limited, 2019 ONCA 515, the Court of Appeal for Ontario (“OCA”) 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 OCA 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 Mikelsteins (“Mikelsteins”) was employed by an engineering firm called Morrison Hershfield Limited (“the employer”) for 31 years, most recently as Director, Business Development, when on October 26, 2017, he was terminated without cause and without notice. 

Under the terms of the Shareholders’ Agreement, Mikelsteins 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.

Mikelsteins 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.  Mikelsteins did not receive any share bonuses from the date of his termination.

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

Decision of the Motion Judge

The motion judge made determinations as to: (a) Mikelsteins’ wrongful dismissal claim; (b) the trigger date for the employer’s right to repurchase Mikelsteins’ shares and for the value he was entitled to be paid for them; and (c) Mikelsteins’ entitlement to a share bonus.  

The motion judge awarded Mikelsteins damages for wrongful dismissal based on a 26-month notice period.  He also concluded that Mikelsteins 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 Mikelsteins’ shares and the share bonus. 

Decision of the OCA

Calculation of the Value of Mikelsteins’ Shares

The OCA 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 Mikelsteins 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 Mikelsteins’ 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 OCA noted that once ownership of the shares was transferred back to the employer, Mikelstein 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 Mikelsteins v. Morrison Hershfield, 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.   

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.