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Court of Appeal to revisit employee’s right to wrongful dismissal damages regarding shareholdings

Update: The Court of Appeal reconsidered its earlier decision in light of Matthews v. Ocean Nutrition Canada Ltd. but it did not change the outcome of the appeal. Read a summary of the Appellate court’s affirmed decision here.

Canada’s highest court has recently remanded a case back to the Ontario Court of Appeal for disposition dealing with an employee’s entitlement to damages relating to his shareholdings in his former employer’s parent company. The Supreme Court of Canada remanded Mikelsteins v. Morrison Hershfield Ltd. without reasons but on the basis of its recent decision in Matthews v. Ocean Nutrition Canada Ltd. In Matthews, the Supreme Court of Canada had restored a trial judgment awarding an employee damages as compensation for the lost bonus he would have earned under a long-term incentive plan (“LTIP”) during the notice period. While there was an exclusion clause in the LTIP, it did not cover the exact circumstances at issue and unambiguously alter the employee’s common law entitlement to the bonus.

Ivars Mikelsteins (“Mikelsteins”) was employed by Morrison Hershfield Ltd. (“MHL”) for 31 years. His most recent position at the employee-owned engineering firm was Director, Business Development. Mikelsteins was dismissed without cause on October 26, 2017. At that time, Mikelsteins owned 5108 shares in MHL’s parent company; shares were made available to Mikelsteins as an employee, and a select group of other employees, for purchase and he bought shares, which were governed by a Shareholders’ Agreement. Mikelsteins and other shareholders received annual share bonuses paid in accordance with the Shareholders’ Agreement.

Mikelsteins brought a partial summary judgment motion for wrongful dismissal damages relating to the issue of his share valuation, gross-up, and share bonus. On the motion the parties agreed that Mikelsteins was terminated without cause and without reasonable notice. Ontario Superior Court Justice Nakatsuru held that Mikelsteins 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 MHL had ceased) and to receive damages for the loss of the share bonus that would have been payable during such 26 month period. Justice Nakatsuru held that the evidence showed that the Shareholders’ Agreement was a significant and integral part of Mikelsteins’ compensation package.

On appeal, the Court of Appeal for Ontario set aside the motion judge’s decision and held that Mikelsteins received his shares pursuant to the Shareholders’ Agreement and therefore the terms of that agreement, and only those terms, were determinative of his rights with respect to those shares. Mikelsteins’ common law entitlements to compensation for breaches of the employment contract did not apply to his contractual entitlements regarding his shares.

As the Supreme Court of Canada had noted in Matthews, the issue is what damages a wrongfully or constructively dismissed employee is entitled to and whether the employee is entitled to compensation for bonuses he or she would have earned had the employer not breached the employment contract. The Supreme Court of Canada prescribed that courts should take a two-step approach as follows:

  1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? if so,
  2. Do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

The Supreme Court in Matthews also clarified that for the purposes of calculating wrongful dismissal damages the employment contract is not treated as “terminated” until the reasonable notice period expires.

Based on the Supreme Court of Canada ’s ruling in Matthews it is possible, and even likely, the Court of Appeal will overturn its decision regarding Mikelsteins’ entitlements respecting his shares. What his entitlements were regarding his shares during the notice period depend in part upon his shareholder status and the meaning of “termination” in the Shareholders’ Agreement. The Shareholders’ Agreement provided that a shareholder’s termination by the Corporation of his/her employment with the Corporation triggered a deemed Transfer Notice; a Transfer Notice set in motion a share purchase process, by the Corporation or the remaining shareholders, 30 days from the date the terminated shareholder was notified of such termination by the Corporation as well as the setting of the valuation of those shares.

In Mikelsteins’ case , the Shareholders’ Agreement did not define “termination” and therefore it is likely that the employee’s common law entitlements were not ousted by the terms of the Shareholders’ Agreement because the terms are not clear, as held by the motion’s judge. Since Mikelsteins was unlawfully terminated without notice, for the purposes of calculating his damages with respect to the shares it may be reasonable for the Court of Appeal to find that he continued to be a shareholder during the notice period, would have received a share bonus during that period, and that he should be entitled to benefit from any increase or bear the risk in any decrease in value of his shares up to 30 days after the notice period expired.

Employers can expect that the language contained in employment contracts, incentive plans and shareholders’ agreements will continue to be held to a high standard by our courts. We await the effect of the Supreme Court’s decision in Matthews regarding wrongful dismissal damages in the employee-shareholder context.

Masiel A. Matus
Affleck Greene McMurtry LLP

Masiel A. Matus

Masiel has a broad commercial litigation practice and represents both national and international clients in a variety of complex matters. Masiel has experience litigating cases involving professional negligence, commercial leasing and real property disputes, insurance, contract disputes, shareholder disputes, fraud, breach of fiduciary duty, breach of trust, employment matters and defamation claims.

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