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A recent Ontario Court of Appeal decision determined that the terms of a shareholders’ agreement apply as written, regardless of whether an employee was terminated with or without cause.

What Happened?

The employer is an employee-owned engineering firm that provides engineering and construction consulting services. 

The employee was employed by the employer for 31 years, most recently in the position of Director, Business Development. On October 26, 2017, the employee was notified in writing that his employment was being terminated without cause, effective immediately.

The employee commenced an action for wrongful dismissal. In granting partial summary judgment, the motion judge awarded the employee damages for wrongful dismissal based on a notice period of 26 months. That determination was not appealed.

The motion judge also made a determination regarding the value that the employee was entitled to be paid for the shares that he held in the employer’s parent corporation, along with his entitlement to a share bonus. Those determinations were the subject of the appeal.

Shareholders’ Agreement

The employee was one of a select group of employees who were eligible to purchase shares of the employer’s parent corporation. 

Those shares were governed by the terms and conditions of a shareholders’ agreement. At the time that his employment was terminated, the employee owned a total of 5,108 shares.

Under the terms of the shareholders’ agreement, the employee and other shareholders were eligible to receive annual “share bonuses”. The share bonus payable in respect of each share was determined by an objective calculation based on the company’s financial results. As a result, the total share bonus payable to each shareholder depended on the total number of shares that the shareholder had previously decided to purchase. The share bonus was not related to the shareholder’s contributions as an employee; it was, in effect, a dividend. 

With respect to the employee’s shareholdings, the motion judge determined that he was entitled to: 

  • hold the shares until the end of the reasonable notice period (i.e. 26 months after he was notified of his termination and his association with the employer had ceased); and 
  • receive damages for the loss of the share bonus that would have been payable during such 26 month period.

Article 3 of the shareholders’ agreement dealt with “Automatic Transfer Notices”, and applied in situations where, among other things, a shareholder resigns, is terminated, becomes bankrupt, or dies. Article 3.2 applied in cases of termination, and stated:

“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 proceeded to specify that a shareholder who was deemed to have given a Transfer Notice under Article 3 was entitled to the “fair value” of his or her shares. 

The employer took the position that the employee’s association with it had ceased by reason of the termination of his employment on October 26, 2017, which became the “trigger” date for purposes of the shareholders’ agreement. 

In accordance with that position, the employer paid the employee the sum of $999,431 (representing the “fair value” of his shares on November 25, 2017, which was 30 days from October 26, 2017, the date of his termination).

The motion judge disagreed with the employer’s position. He concluded that the employee was entitled to receive payment for his shares with the value calculated at the end of the reasonable notice period. The motion judge also concluded that the employee was entitled to the share bonus that would have accrued during the notice period. The motion judge reached this conclusion based on his view that the “basic principle to be applied is to put the person in the same position they would have been in if lawfully terminated”. 

Court of Appeal Decision

At the outset, the court stated that the motion judge had erred in concluding that the employee was entitled to compensation in respect of his shares calculated at the end of the notice period. 

The court found that the motion judge improperly conflated the employee’s entitlement to compensation arising from the breach of his contract of employment with his contractual entitlements respecting his shares. 

The court stated that it was the terms of the shareholders’ agreement that determined the employee’s rights with respect to those shares and that the common law relating to compensation for breaches of a contract of employment did not apply to the employee’s entitlements regarding his shares, stating:

“[The employee’s] entitlements relating to his shares are separate and apart from the relief to which he is entitled arising from his contract of employment. His entitlements relating to his shares fall to be determined by the terms of the Shareholders’ Agreement. […]

None of this turns on whether the employee has been terminated with or without cause.”

The court found that the shareholders’ agreement expressly provided that the corporation became entitled to repurchase the shares 30 days from the date the shareholder was “notified of such termination”. It further found that this conclusion also dealt with the share bonus issue; once it was concluded that the shares had to be transferred resulting from the employee’s termination, he ceased to have any entitlement to any bonus arising from the shares that he no longer owned.

As a result, the appeal was allowed, as the court determined that the employee had already received what he was contractually entitled to when he was paid for his shares.

Get Advice

At Campbell Bader LLP, we have been helping businesses and business owners with matters related to shareholder agreements since 1999. We are proud of the strong client relationships we have built since then. We take the time to understand your business before deciding on a course of action, keep you well informed throughout the process and ensure you make the best strategic decisions at every stage. 

If you have questions about unfair practices in the workplace, wrongful dismissal, or any other employment matter, contact the Mississauga employment lawyers at Campbell Bader LLP. We regularly advise both employers and employees on a wide range of issues that arise at work. Contact us online or by phone at 905-828-2247 to schedule a consultation.