Executives often receive different forms of compensation such as salary, bonus, short-term incentive compensation, long-term compensation, stock options, and income from shares in the corporation.
In recent years, the Ontario Court of Appeal (“OCA”) has been asked whether or not an employee is entitled to receive variable compensation during the applicable notice period.
This blog summarizes a recent OCA case which considered the rights of an employee/shareholder.
In this case, the employee owned over 5000 shares in the Company and was a party to a Shareholder Agreement. He received dividend income from the shares each year.
The section in the Shareholders’ Agreement which applied where a shareholder is terminated 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.”
Mr. Mikelsteins was terminated without just cause after 31 years service and the trial judge concluded he should have received 26 months notice of termination.
Was Mr. Mikelsteins entitled to damages equal to the dividend income he would have earned during the 26 month notice period?
The trial judge concluded Mr. Mikelsteins was entitled to dividend income during the 26 month notice period but the OCA disagreed and reversed the trial judge’s decision. When coming to this conclusion, the OCA stated:
The Shareholders’ Agreement does not alter any term or condition of employment. Indeed, this alternative argument repeats the same error made by the motion judge which is the conflating of Mr. Mikelsteins’ rights under his contract of employment regarding his entitlement to reasonable notice, and his rights under the Shareholders’ Agreement regarding his shares, and treating them as one and the same. They are not…Mr. Mikelsteins’ entitlement respecting the shares that he owned is determined in accordance with the terms of the Shareholders’ Agreement and only that agreement.
Lessons to Be Learned:
1. Executives often wear more than one hat. Their rights as a shareholder are different than their rights as an employee.
2. When an employee is terminated, most privately owned employers do not want the former employee to continue to be a shareholder. An employer can include a clause in a shareholder agreement which requires the employee to sell his or her shares as of their last day of employment.
3. Although not considered in this case, it is possible for an employer to limit the amount of damages that it is required to pay an executive for variable compensation during the applicable notice period. Clear and unambiguous language is needed in the employment contract or the variable pay plan, as the case may be.
For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416-317-9894 or at [email protected]
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