Shareholders’ agreements govern employee share rights on termination

The Ontario Court of Appeal confirmed in Mikelsteins v. Morrison Hershfield Limited¹ that the terms of a shareholders’ agreement govern an employee’s rights with respect to his or her shares on termination.

What you need to know

• Contractual rights under a shareholders’ agreement cannot be conflated with an employee’s entitlement to damages for wrongful dismissal.
• Employers can take comfort that employee rights with respect to shares purchased under a shareholders’ agreement will be governed by the agreement, including on termination.

Background

The plaintiff, Ivars Mikelsteins, was terminated by Morrison Hershfield Limited (MHL) without cause (and without notice) after 31 years of employment.

While employed by MHL, Mr. Mikelsteins had been entitled to purchase shares of his employer pursuant to the terms of a shareholders’ agreement. Among other things, the shareholders’ agreement provided that:

• shareholders were entitled to receive an annual payment called a “share bonus”; and
• on termination of a shareholders’ employment by MHL, the shareholder (i) was deemed to provide a “transfer notice” with respect to his or her shares effective 30 days from the date that he/she was notified of the termination by MHL (with the effect that ownership of the shares transferred back to MHL) and (ii) was entitled to be paid the “fair value” of his or her shares.

Although MHL did not provide Mr. Mikelsteins with notice of termination, it did pay Mr. Mikelsteins approximately $1 million, representing the fair value of Mr. Mikelsteins’s shares, 30 days from the date of his termination (transfer date). It did not pay Mr. Mikelsteins any share bonuses from the transfer date forward.

Mr. Mikelsteins commenced an action for wrongful dismissal against MHL and successfully moved for summary judgment. The motion judge awarded Mr. Mikelsteins damages for wrongful dismissal based on a notice period of 26 months. Importantly, the motion judge determined that, notwithstanding the terms of the shareholders’ agreement, Mr. Mikelsteins was entitled to (i) hold the shares of MHL until the end of the 26-month notice period and (ii) receive damages for the loss of the share bonus that would have been payable during the notice period. The motion judge’s decision was premised on the proposition that the principle of wrongful dismissal damages is “to put the person in the same position they would have been in if lawfully terminated.”

The Court of Appeal decision

The Court of Appeal reversed the motion judge’s decision relating to Mr. Mikelsteins’s shares, stating that the motion judge had “improperly conflat[ed] Mr. Mikelsteins’s entitlement to compensation arising from the breach of his contract of employment with Mr. Mikelsteins’ contractual entitlements respecting his shares.”

Because Mr. Mikelsteins received his shares pursuant to the shareholders’ agreement, his rights with respect to those shares were governed exclusively by the shareholders’ agreement. Accordingly, he was entitled to be paid the fair value of his shares as of the transfer date. He was not entitled to hold his shares beyond the transfer date or to be paid any share bonuses after the transfer date.

The Court of Appeal also rejected Mr. Mikelsteins’s alternative argument that the shareholders’ agreement termination provisions violated section 60(1)(a) of Employment Standards Act, 2000 (ESA) and were therefore void. Section 60(1)(a) of the ESA provides that “[d]uring a notice period…the employer…shall not reduce the employee’s wage rate or alter any other term or condition of employment.” The Court found that the shareholders’ agreement did not alter any term or condition of employment, noting that this argument similarly conflated Mr. Mikelsteins’s entitlement to reasonable notice and his contractual entitlements under the shareholders’ agreement.

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¹ 2019 ONCA 515.

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