Employee was wrongfully dismissed and therefore still owned 9 per cent of shares when company was sold more than a year later
An Ontario employer has discovered that wrongfully dismissing an employee doesn’t just leave it on the hook for pay in lieu of notice if the employee owns company shares. It could mean a whole lot more if the employer wants those shares back or sells to someone else.
The Ontario Court of Appeal recently confirmed employees who are shareholders may have additional entitlements in relation to their shares at the time of termination. This flows from an employee’s right, upon being dismissed without cause, to be “made whole” during the reasonable notice period.
In Link v. Venture Steel Inc., William Link became a founding employee of Venture Steel, a Toronto-based flat rolled steel processor and distributor, in 1996. The company prospered and in 2004, a shareholder’s agreement was entered into between Ruben Rivas, who controlled Venture, and other executives, including Link. Link became a management shareholder and received 90,000 common shares of Venture, comprising nine per cent of the company.
On Feb. 21, 2005, Link’s employment was terminated for cause. By letter dated May 17, 2005, the company wrote to Link and claimed to repurchase his shares under a provision of the shareholder’s agreement permitting the repurchase for an aggregate price of $1, where the triggering event was Link’s dismissal for cause. At no time did Venture attempt to purchase Link’s shares for their proper book value. On April 30, 2006, Royal Laser Corporation purchased Venture for $43.5 million. Link was not a party to the share purchase agreement and was not given notice of the sale, as the shareholders’ agreement he had signed stipulated.
The Ontario Superior Court of Justice found cause did not exist for Link’s dismissal. The court determined the reasonable notice period was 12 months and awarded Link damages including compensation and a lump sum in lieu of benefits over the notice period. Link also claimed damages for losses flowing from his rights as a shareholder.
Employer couldn’t rely on just cause provision of shareholders agreement
In determining Link’s entitlement, the court considered the terms of the shareholders’ agreement and when Link ceased in law to be a shareholder. Under the agreement, each management shareholder granted to Rivas an irrevocable option to acquire, and Rivas granted an irrevocable option to sell, in the event of a “Triggering Event.” The agreement provided that when the Triggering Event was termination with cause, the total aggregate purchase price for a management shareholder’s shares would be $1. Where the Triggering Event was termination without cause, the purchase price would be 100 per cent of net book value. The shareholders’ agreement also stipulated the purchase price would be 20 per cent of net book value if the employee’s dismissal occurred in the first 12 months after becoming a shareholder, and increased by 20 per cent for each 12 months the management shareholder was a party of the agreement.
Notably, the shareholders agreement contained a piggyback provision, which provided that if Rivas received an offer to purchase all or a majority of the shares in Venture from a third party that he wished to accept, then the management shareholders would have the right to require their shares to be sold to the prospective purchaser in the same proportion as Rivas’ shares were sold and on the same terms and conditions.
The court found that because Venture did not have cause to dismiss Link, the May 17, 2005 letter purporting to repurchase Link’s shares for $1 had no legal effect. The court also found the “lawful dismissal” of Link did not occur until after the end of the applicable period of reasonable notice — Feb. 20, 2006.
Justice Randall Echlin of the Ontario Superior Court referred to the “make whole” principle set out by the Ontario Court of Appeal in Veer v Dover Corp. (Canada) Ltd.:
“I am of the view that the employer, in this instance, has not sufficiently contractually prohibited the extension of the termination date to the end of the common law period to find otherwise. If the intent of the law is to place employees into the position they would have been in had proper notice been given, then unless the employer has clearly disentitled the employee to such extension, the law anticipates that the parties bargained for a lawful dismissal.”
Fired employee still owned shares when company was sold
Because the lawful dismissal did not occur until Feb. 20, 2006, Link would have still owned his shares under the shareholders’ agreement as of April 30, 2006, when Venture was sold, and would be been able to take advantage of his piggyback rights. Link was awarded damages of $3,246,825, equivalent to nine per cent of the purchase price paid by
Royal Laser after specified deductions.
The Ontario Court of Appeal affirmed the trial court’s finding that Venture had not made a valid repurchase of Link’s shares on May 17, 2005, and that he remained a shareholder on April 30, 2006. Accordingly, Link had the right to exercise his piggyback rights under the Shareholder Agreement.
While the Link decision turns upon its very specific facts, employers should be aware that just like agreements granting employees options to purchase shares, shareholder agreements may confer rights that extend beyond the date an employee is given notice of dismissal. Unless the termination language in a shareholder agreement clearly causes shareholder rights to terminate at the time a dismissal is communicated to the employee, then the employee may continue to enjoy his rights as a shareholder until the end of any reasonable notice period. In Link, because the company was sold and the plaintiff had piggyback rights, these entitlements were substantial. Care should be taken in drafting such provisions so that both parties understand their respective rights and obligations when a dismissal occurs.
For more information see:
•Link v. Venture Steel Inc., 2010 CarswellOnt 1049 (Ont. C.A.).
•Veer v Dover Corp. (Canada) Ltd., 1999 CarswellOnt 1466 (Ont. C.A.).
