Retirement plan did not alter exec’s right to dividends

Employer offered salary protection, three options

Although employment law often overlaps with company law, you should be aware that many employment lawyers are not fully conversant with provincial and federal legislation regulating corporations.

For example, lawyers sometimes forget that employees may claim oppression under corporation statutes as an alternative to wrongful dismissal. As well, corporations law can affect perquisites, such as stock options and dividends.

A recent example arises in Malcolm v. Transtech Holdings. Transtech had provided shares to James Malcolm as part of his remuneration as an executive with the company.

In 1985, Transtech presented Malcolm with a proposal stating that he and two other executives, Froese and Miller, would receive the shares.

The proposal provided a set dividend per year paid against redemption of a portion of the shares annually. It was meant to guarantee the three men an income stream into retirement, and to help provide for their families after their deaths.

To finance the share purchase, the proposal suggested payment to the men of $12,500 per year. As well, it stipulated that all shares were to be redeemed on each shareholder’s death to that person’s estate.

Malcolm signed the proposal in principle, making a note on it that his agreement was subject to his final approval of all terms.

He signed a formal agreement a few weeks later, which repeated a stipulation in the proposal that he was to receive at least half his salary on retirement plus the redemption value of his remaining preference shares.

He received the $12,500 payments yearly, but no dividends, although dividends were declared so that they could be paid to Froese, who had retired. Malcolm was unaware of these payments, but Transtech contended that, as a sophisticated businessman, he should have understood the arrangement.

Transtech claimed that all parties had a tacit understanding that no dividends were payable until retirement.

However, it agreed that in 1992 the company presented Malcolm a form saying that he waived entitlement to past dividends and that Malcolm refused to sign the document.

The British Columbia Supreme Court has held that Malcolm was entitled to his share of all past dividends plus interest from the date they were to be paid.

The proposal letter, the court says, was not a legal agreement; it was merely a proposal and did not bind Malcolm. In the formal agreement, Malcolm did not waive receipt of any declared dividends.

The attempt to get Malcolm to waive his rights in writing raised a strong inference, the court found, against the company and its position of a tacit understanding about foregoing dividends.

Finally, the principal corporate law lesson of the case is this: The company cannot pay dividends without declaring them first. But if it declares them, generally it must pay them to all those holding shares with dividend entitlement. In this case, there was nothing in Transtech’s articles of incorporation derogating from that basic principle.

For more information:

Malcolm v. Transtech Holdings Ltd., 2000 BCSC 942, Vancouver Registry, C940534, June 19/00.

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