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Two months ago, in our How to Calculate Wrongful Dismissal Damages for Variable Compensation article, we wrote about Manastersky v. Royal Bank of Canada, and how the courts approach calculating damages for lost incentive compensation during a reasonable notice period. We referenced the “Purist Approach” and the “Pro rata Approach”. The Court of Appeal applied a Purist Approach in Manatersky and only awarded payments under an incentive plan that came due under the terms of the plan during the reasonable notice period. In doing so, the Court rejected the plaintiff’s suggestion that Mr. Manatersky was entitled a prorated amount based on past payouts. The case was appealed to the Supreme Court of Canada and the Supreme Court remanded the case back to the Court of Appeal to reconsider the case in light of the Matthews v. Ocean Nutrition Canada Ltd. decision. The Court of Appeal’s decision did not change.
Recently, the Supreme Court of Canada denied leave to appeal of the Court of Appeal’s decision in Mikelsteins v. Morrison Hershfield Limited. The Mikelsteins case had a similar path as the Manatersky case: a summary judgment motion before the Ontario Superior Court of Justice, first appeal before the Ontario Court of Appeal, leave to appeal to the Supreme Court of Canada, remanded back to the Court of Appeal to consider the impact of Matthews, second appeal and then back to the Supreme Court of Canada. Once again, the Court of Appeal did not change its ruling on the second round and now that the Supreme Court of Canada has denied leave to appeal, the Court of Appeal’s decision is the final word.
In this article, we ask the question whether the Mikelsteins decision affirms the Purist Approach or the Pro rata Approach. As it turns out, it does neither.
Relevant Facts
Ivars Mikelsteins was a long-service employee of Morrison Hershfield Limited (“MHL”). On October 26, 2017, he was terminated without cause. At the time of his termination, he held the position of Director, Business Development for the Telecom Business Unit.
During his employment, Mr. Mikelsteins was part of a small group of employees who were eligible to purchase shares of MHL. Mr. Mikelsteins purchased a total of 5,108 shares and entered into the Amended and Restated Morrison Hershfield Group Inc. Shareholders’ Agreement (the “Shareholders’ Agreement”) which set out terms and conditions regarding the shares held by shareholders. As a shareholder, Mr. Mikelsteins received annual share bonuses on an annual basis which were about $150,000.00 over a three-year period. Under the Shareholders’ Agreement, shareholders who were no longer affiliated with the company because their employment was terminated were deemed to have served a Transfer Notice 30 days after their last day of work. This triggered a buy back of the shares at fair value.
Summary Judgment Decision
Mr. Mikelsteins brought a motion for summary judgment seeking damages for his wrongful dismissal. The Ontario Superior Court of Justice found that the appropriate reasonable notice period was 26 months. The fundamental disagreement between the parties was whether Mr. Mikelsteins was entitled to damages for the lost value of the share bonuses that he would have earned if he had held onto the shares for the duration of the notice period. Secondly, the parties disagreed on whether he was entitled to damages equal to the additional value of the shares that accrued over the notice period.
The motion judge found that the share ownership was a “significant and integral part of the compensation package received by Mr. Mikelsteins.” Additionally, the Court found that Shareholders’ Agreement did not oust Mr. Mikelsteins’ common law entitlements. In the context of this case, the Court found that Mr. Mikelsteins’ common law rights meant that he should be placed in the same position he would have been in if he had continued to hold the shares to the end of the notice period. He was awarded damages for the lost share bonuses and also for the difference in the value of the shares between the deemed transfer date and the end of the notice period.
The Court Of Appeal Decision – Take 1
The Court of Appeal disagreed with the lower court. The Court held that the motion judge improperly conflated Mr. Mikelsteins’ entitlement to compensation arising from the breach of contract of employment with his contractual entitlements respecting his shares. Mr. Mikelsteins received his shares pursuant to the Shareholders’ Agreement, and it is the terms of the Shareholders’ Agreement that determine his rights with respect to those shares. The common law relating to compensation for breaches of a contract of employment did not apply to Mr. Mikelsteins’ shares.
The Court Of Appeal Decision – Take 2
In Matthews, the Supreme Court sets out two questions a court should ask itself when assessing an employee’s damages arising from a wrongful dismissal:
- whether, but for the termination, the employee would have been entitled to the bonus during the reasonable notice period
- whether there is something in the bonus plan that would specifically remove the employee’s common-law entitlement
After reviewing the questions, the Court of Appeal concluded that the Matthews questions were directed at determining the damages an employee is entitled to arising from a breach of contract of employment, and in this case, Mr. Mikelsteins’ claim to dividends did not arise from the breach of his contract of employment. The Court of Appeal was determining Mr. Mikelsteins’ rights as a shareholder pursuant to the Shareholders’ Agreement. Mr. Mikelsteins did not receive his shares as some form of compensation as an employee of MHL. Rather, he chose to purchase the shares and his purchase was governed by the Shareholders’ Agreement. His only entitlement was as shareholder.
The Court of Appeal affirmed their previous appeal decision.
Conclusion Regarding the Purist v. Pro Rata Approach
The Court of Appeal’s decision in Mikelsteins turns on the fact that the shares were purchased and not given to Mr. Mikelsteins by the company. The fact that the opportunity to purchase shares arose from his employment and that the shares could only be held as long as he was an employee, did not seem to be relevant to the Court of Appeal. The relevant fact was that Mr. Mikelstein bought the shares subject to the Shareholders’ Agreement and therefore terms of the Shareholders’ Agreement governed. This is consistent with a Purist Approach as it strictly applies the terms of a contract to determine an entitlement upon termination. However, the case does not add to the dialogue about the Purist versus Pro rata approach under employment contracts because of the finding that the entitlement did not arise under an employment contract.
There is still an outstanding debate regarding the appropriate approach to calculating wrongful dismissal damages with variable compensation. Leave to appeal to the Supreme Court of the second Court of Appeal decision in Manastersky has yet to be decided. In the meantime, with the Mikelsteins decision there is now some certainty that if an employee has the opportunity to purchase shares with their own money, under a shareholder agreement, then the shareholder agreement will dictate their entitlements.