A Cautionary Tale For Senior Executives: Court Denies Leave To Appeal in a Decision Confirming That Shareholders’ Agreement Governs An Employee’s Rights In A Wrongful Dismissal Case

January 20, 2022

For many senior executives and c-suite employees, it is common to receive compensation in the form of shares which can be a a lucrative and integral component of an employee’s overall compensation package. However, employees should consider themselves warned: the courts have confirmed that employers will be permitted to draft contracts which treat an employee’s shareholdings as distinguishable from other forms of compensation, thereby excluding them from the calculation of reasonable notice in the case of a wrongful dismissal.

In a controversial decision, Mikelsteins v. Morrison Hershfield Limited, the Court of Appeal considered whether the terms of a Shareholders’ Agreement should be treated as separate and distinct from an employee’s entitlement to damages at common law in a wrongful dismissal case. The Court held that the common law relating to damages for breaches of an employment contract did not apply to the employee’s shares, which were governed by the terms of a separate Shareholders’ Agreement. On January 20, 2022, the Supreme Court of Canada dismissed the employee’s motion for leave to appeal the Court of Appeal’s decision, effectively upholding the Court’s finding that an employee was not entitled to any additional damages in respect of the loss of his shares over the reasonable notice period.

Motion Judge’s Decision

Ivars Mikelsteins (the “Employee”) had been employed for approximately 31 years by Morrison Hershfield Limited (the “Company”), an engineering and construction consulting firm. After receiving notice of his termination without cause, the Employee commenced an action for wrongful dismissal and subsequently brought a motion for summary judgment. In granting partial summary judgment, the motion judge awarded the Employee damages for wrongful dismissal over a notice period of 26 months.

As part of his total compensation as a senior executive, the Employee was eligible to purchase shares in the Company’s parent corporation pursuant to the terms of a Shareholders’ Agreement. At the time of his termination, the Employee owned approximately 5,108 shares. The Company appealed from the partial summary judgment entitling the Employee to retain his shares through to the end of the 26-month notice period, and awarding him damages in lieu of the loss of a corresponding share bonus during that same period.

Court of Appeal’s Decision

Under the terms of the Shareholders’ Agreement, upon a termination without cause an employee was deemed to have given a Transfer Notice governing all of his or her existing shares. The Transfer Notice became effective within 30 days from the date that the employee received notice of termination (the “Trigger Date”). The Shareholders’ Agreement further specifies that a shareholder that is deemed to have given a Transfer Notice is entitled only to the “Fair Value” of his or her shares as of the Trigger Date (as that term is defined in the Shareholders’ Agreement). On appeal, the Company took the position that the Employee’s employment was terminated on October 26, 2017, which became the “Trigger Date” for the purposes of the Shareholders’ Agreement. As such, the Employee was not entitled to retain his shares through to the end of the notice period, nor was he entitled to damages in lieu of any share bonus that would have accrued during that same period.

On behalf of the Court of Appeal, Justice Nordheimer allowed the appeal and set aside the motion judge’s damages award in respect of the shares. In doing so, he noted that “… there is a difference between what a dismissed employee is entitled to as damages in lieu of notice upon termination of the employment contract and what the employee is entitled to under the terms of more specific contracts.[1]” Relying on the Court’s earlier decisions in Evans v Paradigm Capital Inc. and Love v. Acuity Investment Management Inc. and distinguishing the facts in the case from another seminal Court of Appeal decision, Paquette v. TeraGo Networks Inc., Justice Nordheimer concluded that the Employee’s rights in respect of his shares could only be governed by the terms of the Shareholders’ Agreement. That is, the motion judge had erred in law by conflating the employee’s rights under his employment contract and his rights in respect of his shares pursuant to the Shareholders’ Agreement and treating them as one and the same.

Key Takeways

By determining that an employee’s rights under a Shareholders’ Agreement are distinguishable from their entitlement to damages for wrongful dismissal, the Court is effectively inviting employers to draft contracts which purport to exclude a key component of an employee’s compensation from the calculation of reasonable notice upon a termination without cause. Often, documents such as Shareholders’ Agreements are standard form contracts that are not subject to negotiation. As such, senior executives should be aware of the implications of this decision and should always proactively seek legal advice when negotiating their employment contracts. If you require any assistance, feel free to contact any of the lawyers at Mathers McHenry & Co.

[1] Mikelsteins v. Morrison Hershfield Limited, 2019 ONCA 515 at para 16.