Employment & Labour

OCA says shares held by employee valued at date of termination

By Barry B. Fisher

In this case, the court had a situation where the plaintiff held private shares in the defendant which, pursuant to a shareholders agreement, were deemed to be sold back to the defendant upon termination of employment. From time to time the defendant would issue bonuses to shareholders, which I assume were like dividends. The trial judge awarded the plaintiff the bonuses that would have been paid to her had she been employed during the 11 month notice period that was awarded.

The appeal court said no way. Citing this case, they held that the proper date for valuing shares that the employer had the right to repurchase upon termination was the actual date of termination, not the end of the notice period. The court seemed to assume that it would be unfair to give the plaintiff her return of share capital immediately and also give her the bonuses over the notice period without her capital being at risk.

I think that this is wrong.

The plaintiff is entitled to be in the same economic position as if she had been permitted to work through the notice period. Only at the end of the notice period should she get her capital back and thus she should get whatever dividends would have been paid to her (and was paid to another shareholder who fired her).

Now the OCA has created a difference between an employee who has stock options (these will generally continue during the notice period) and the employee who actually owns shares that are subject to redemption upon termination.

Both of these mechanisms are part of an employee’s total compensation. Why should they be treated so differently upon a wrongful termination?

There is only one rational reason that I can think of for making this distinction.

If one owns stock options and the strike price is below water throughout the notice period, then the lost options are worthless.

However, if the market price exceeds the strike price, then once you determine the notice period and assume that the employee would have exercised the options and sold the underlying shares immediately, the calculation of the loss is simple. You calculate the difference between the strike price and the price on the day of sale and that is the measure of damages.

If the employee holds the stock and the repurchase price is set at the end of the notice period, then the parties position on the appropriate notice period may be driven not by the Bardal factors but by the share price on a given day.

Imagine a stock whose price fluctuates significantly from day to day. Since the notice period is determined by the court well after the event, if the stock price dropped 50 per cent from month six to month nine, the plaintiff would be arguing for the shorter notice period and the defendant for the longer period.

In the current case, if the share price had dropped from date of termination to the end of the notice period and no dividends were paid, then the parties would have reversed their arguments.

In other words, for purposes of commercial certainty and legal predictability, it may make sense to treat stock options differently than stocks held by the employee that are subject to repurchase upon termination of employment.

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