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Notice Periods and Stocks – Recent Decision Turns a $1 Stock Buy-Back into a $3.2M Wrongful Dismissal Award

Posted On: January, 20 2015

In most wrongful dismissal cases the plaintiff’s damages are calculated based on several factors, including the plaintiff’s age, position, years of service, and salary.  But what happens when part of an employee’s compensation also consists of stock in the company or stock options?  This important issue was recently considered by the Ontario Court of Appeal.

In the case Link v. Venture Steel Inc., William Link sued his former employer, Venture Steel, for wrongful dismissal after being dismissed for cause. As a management shareholder, Mr. Link held 90,000 common shares in Venture Steel at the time his employment was terminated. Mr. Link’s shareholder’s agreement with Venture Steel contained a clause which stipulated that if Mr. Link were terminated “for cause” then Venture Steel would have the automatic right to buy back all of his shares for $1. The cause alleged by Venture Steel was that Mr. Link had wrongfully received $3,621 worth of carpet installation from a company supplier at no charge.

Mr. Link sued Venture Steel for wrongful dismissal, alleging that Venture Steel did not have cause to terminate his employment, and that Venture Steel’s attempt to buy back all of his shares for $1 was therefore not permitted under the shareholder’s agreement.  At trial, Justice Echlin of the Ontario Superior Court found that Venture Steel did not have cause to terminate Mr. Link’s employment as a result of the carpet installation, and that Venture Steel therefore owed Mr. Link the market value of his shares, which ended up being worth $3.2M due a corporate takeover that happened during the notice period, instead of the $1 that Venture Steel had attempted to pay him.

An important determination by the Court at trial was that the relevant period for fixing the market value of Mr. Link’s shares was the end of his notice period, not the end of his period of active employment. The net effect of the finding that there was no cause to terminate his employment was that Mr. Link remained a shareholder up until the last day of his notice period and that he should be compensated for the market value of his shares as of that date, not an earlier date. Given Venture Steel’s takeover by another company during Mr. Link’s notice period, Mr. Link’s shares were now worth an astonishing $3.2 million.

The Court of Appeal largely confirmed the trial judge’s decision, finding that there was no cause to terminate Mr. Link’s employment and finding that Venture Steel’s attempt to re-purchase his shares for $1 was invalid.  This is a significant decision because it upholds the principle relied on by the trial judge, which is that the “intent of the law is to place employees in the position they would have been in had proper notice been given…”  What this means for employers and employees is that the normal rights and benefits that an employee would have as an active employee will continue throughout the notice period, unless a specific agreement is made to contrary.

 

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