Employment & Labour

Decision preferring contractual over common law rights concerning

By AdvocateDaily.com Staff

Employees should be concerned by a recent Court of Appeal decision distinguishing between employment and shareholder rights, says Toronto employment lawyer Michael Wright.

A unanimous three-judge panel sided with an employee-owned engineering firm over one of its workers, concluding that the terms of a shareholder agreement governed his share entitlements on termination rather than the normal common law presumptions.

While Wright, a lawyer with Wright Henry LLP, has little argument with the final result in favour of the employer, he tells AdvocateDaily.com that he is more disturbed by the way the province’s top court got there.

“For employees, this decision is concerning in terms of the court’s approach, which is to create a false dichotomy by setting up employment and share ownership as distinct entities, and then preferring the interpretation of the shareholder agreement — a contractual right as opposed to a common law right — when there is no real legal justification to do so,” he explains.

Wright says it’s understandable that private companies would no longer want terminated employees to continue as shareholders, but adds that courts should always bear in mind the context of the dual relationship between the parties.

“The only reason the plaintiff in this case owned shares in the company was because he was an employee, and the shares formed part of his compensation,” Wright says. “It’s not like he made a standalone investment or an active decision to invest his retirement savings in the business.

“The shareholdings flow directly from his employment,” Wright adds.

The case dates back to 2017 when the plaintiff was notified he would be dismissed without cause after 31 years of service.

During his employment, the plaintiff was allowed to purchase shares in his employer’s company, according to the terms of a shareholder agreement, which provided for an annual “share bonus” payment.

The agreement also specified that terminated employees were deemed to have transferred their shares in the company 30 days after they were “notified of such termination,” in return for compensation equal to the shares’ fair value.

After launching a wrongful dismissal lawsuit, the plaintiff was awarded damages based on a 26-month notice period on a motion for summary judgment. The motion judge also ruled the man could hold onto his shares until the expiry of the notice period, allowing his claim for damages over the loss of his share bonus in that time.

At the appeal court, the panel ruled that the motion judge got it wrong on the question of his share rights by “improperly conflating [the plaintiff’s] entitlement to compensation arising from the breach of his contract of employment with [his] contractual entitlements respecting his shares.

“[The plaintiff] received his shares pursuant to the Shareholders’ Agreement. It is the terms of the Shareholders’ Agreement that determine [his] rights with respect to those shares,” the judges added. “The common law relating to compensation for breaches of a contract of employment does not apply to [his] entitlements regarding his shares.”

Wright was not surprised the motion judge’s conclusion was overturned due to the way the shareholder agreement was drafted. However, he would like to see the issue return to the appeal court in a separate case to allow another panel the opportunity to adjust the court’s approach.

“I wouldn’t dispute the result here, but it’s how they got there that is troubling,” he says. “The court needs to approach these cases not by preferring contractual rights to common law rights, but by recognizing that when employees are shareholders, the only reason they have that status is through their employment.

“Everything at the time of termination needs to be viewed through that lens,” Wright adds.

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