By Mika Imai
For employees with share entitlements, a big-ticket question post-termination is often whether the employer must compensate the employee for their shares and, if so, the timeline for the sale.
Typically, the answer to this question depends on whether the Shareholders’ Agreement is enforceable in court. Most plans mandate an automatic transfer of shares (with or without compensation) immediately upon, or shortly following termination. As a result, the issue is often whether an employee will be bound by this stipulation.
Historically, Ontario courts have taken two different approaches, treating shares as either:
- Employment-related compensation, meaning that, during the notice period post-termination, employees with shares are entitled to be put in the same position that they would’ve been had they not been terminated; or
- A stand-alone contractual arrangement, meaning that the Shareholders’ Agreement governs the employee’s entitlements.
A June decision from the Ontario Court of Appeal, Mikelsteins v Morrison Hershfield Limited, suggests courts are trending towards this second stance.
In Mikelsteins, the Court of Appeal found that the motions judge improperly conflated Mr. Mikelsteins’ “entitlement to compensation arising from the breach of his contract of employment with Mr. Mikelsteins’ contractual entitlements respecting his shares.” The Court went on to find:
It is the terms of the Shareholders’ Agreement that determine Mr. Mikelsteins’ rights with respect to those shares. The common law relating to compensation for breaches of a contract of employment does not apply to Mr. Mikelsteins’ entitlements regarding his shares.
Once the Shareholders’ Agreement was enforceable, Mr. Mikelsteins’ only entitlement was to the value of the shares 30 days following termination (as set out in the Shareholders’ Agreement) rather than at the end of the (much longer) notice period. So, what’s the impact of the Mikelsteins’ decision? Employees are certainly going to have a harder time receiving compensation for shares into the notice period. This is not to say it’s a forgone conclusion, though – employee entitlement will always come down to the individual terms of employment and the Shareholders’ Agreement in question.