Share Entitlements on Termination - the decision in Mikelsteins v. Morrison Hershfield Limited, 2021 ONCA 155

**Written by Adele Zhang, Summer Student at Lee Workplace Law

An employee's post-employment entitlement to bonuses and shares often arises as a heated issue between the employee and employer. This issue went up to the Ontario Court of Appeal again earlier this year in Mikelsteins v. Morrison Hershfield Limited 2021 ONCA 155 ("Mikelsteins").

In October 2020, the Supreme Court of Canada confirmed in a different case that employees are presumed to be entitled to any bonus that would have been payable during their reasonable notice period following termination. See Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 ("Ocean Nutrition") as well as our blog post: Bonus Entitlements on Termination – the Decision in Matthews v. Ocean Nutrition Canada Ltd.

Since then, the Supreme Court of Canada required the Ontario Court of Appeal to review its earlier ruling in Mikelsteins, so that the legal principle regarding post-employment entitlements is consistently applied. In this blog post, we discuss the outcome of that reconsideration, which clarifies when shares are considered part of an employment compensation package.


Facts

Mr. Mikelsteins was employed by Morrison Hershfield Limited (MHL), an employee-owned engineering and construction consultation firm. He was part of a select group of employees who were eligible to purchase shares in the employer’s parent company, Morrison Hershfield Group Inc. (MHG). These shares were paid for out of pocket by the employees and governed by a Shareholders’ Agreement. The Shareholders' Agreement provided for annual share bonuses to be paid based on the company’s financial results (in effect, a dividend). The Shareholders’ Agreement also provided that, in the event of termination of employment, the employee’s shares would automatically be re-purchased 30 days after the date of termination for fair value.

After 31 years of employment, Mr. Mikelsteins was terminated without cause on October 26, 2017.

Procedural History

In 2018, Mr. Mikelsteins brought a summary judgement motion for wrongful dismissal. He was awarded damages for the reasonable notice period determined by the court (26 months). The motion judge also held that Mr. Mikelsteins was entitled to damages based on the value of his shares in MHG at the end of the reasonable notice period and for the share bonuses that would accrue during that period.

In 2019, MHL appealed. The key issues on appeal were:

  1. Was Mr. Mikelsteins entitled to have his shares valued at the end of his reasonable notice period?; and
  2. Was Mr. Mikelsteins entitled to the share bonuses that would have been payable during the reasonable notice period?

The Court of Appeal decided in favour of MHL, concluding that Mr. Mikelsteins was not entitled to the value of his shares at the end of the reasonable notice period nor was he entitled to the share bonuses that accrued during that time.

These were the same issues which the Court of Appeal was required to reconsider following Ocean Nutrition.


Analysis

In assessing an employee's damages for wrongful dismissal, the questions to ask are:

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

The Court of Appeal emphasized that those questions are directed at determining an employee's entitlement to damages on breach of the contract of employment.

In this case, however, Mr. Mikelsteins' claim to the share bonus did not arise from breach of his employment contract. Rather, the issues at hand were Mr. Mikelsteins’ rights as a shareholder of the parent company, MHG, based on the Shareholders Agreement. Mr. Mikelsteins bought his shares with his own money, and therefore, did not receive these shares as compensation for his employment with MHL. Put simply, Mr. Mikelsteins entitlement to his shares fell to be determined by “his rights as a shareholder of MHG, not by his status as a terminated employee.

As a result, the decision in Ocean Nutrition did not change the outcome of this case. The Court of Appeal affirmed its earlier decision – Mr. Mikelsteins was not entitled to the value of his shares at the end of the reasonable notice period nor was he entitled to the share bonuses that accrued during that time.


Conclusion

This decision makes an important distinction based on the employee's status – those who receive shares as compensation for employment vs. those who are granted the opportunity to purchase shares in a parent company with the employee's own funds.

A question which the Court did not address is whether the outcome might vary if Mr. Mikelsteins' shares were in MHL and not the parent company. Certainly, on the surface it appears that putting distance in the corporate entities in some instances is a relevant and determinative factor.

The decision goes to show that fulsome review of the contractual language and contextual facts in the employment context is absolutely critical. Use of incorrect language may significantly alter the way in which it becomes interpreted and applied down the road. The implications and consequences could be costly.

Stakes can be high. Prior to entering into employment agreements, both employers and employees should seek legal assistance. Lee Workplace would be happy to assist.