Northern Exposure

Love Lost: Canadian Court Refuses to Defer Buyback of Terminated Employee’s Shares

By Maria Giagilitsis

Ontario’s highest court recently ruled that an employer’s right to buy back a senior executive’s shares was triggered on his termination date — not the end of the reasonable notice period. Paul R. Love had argued for the later date. His shares had substantially increased in value during the notice period. Love lost.

As of the termination date, Love had worked for Acuity Investments for only two and a half years. He had accepted the position primarily because he was offered an ownership stake.

Love’s annual compensation was more than $600,000. He held the position of senior vice president and reported directly to the company’s CEO. When his employment was terminated without cause he was 50 years old. He was one of only nine shareholders and owned two percent of the company.

Love sued Acuity. He sought damages for both reasonable notice of termination and the right to continue ownership of his shares until the end of the reasonable notice period.

Reasonable notice
Employees in Canada are entitled to reasonable notice unless there is just cause for the termination, such as misconduct. The trial judge here ruled that reasonable notice for Love was five months.

In an unusual move, the appeal court disagreed. Usually appeal courts defer to the reasonable notice assessments of trial judges. But here it said that the trial judge overemphasized Love’s short service record. And he had underemphasized Love’s senior position and equity ownership. There wasn’t much availability of similar employment. The appeal court therefore increased Love’s reasonable notice award to nine months.

Bigger issue – value of the shares
The shareholder agreement gave the company the right to buy Love’s shares when he “ceased to be employed.” The agreement’s preamble said that Love ceased to be employed upon termination (whether with or without cause), death, or resignation.

At trial, the judge had found that the date for valuing the shares and selling them back to the company was at the end of the reasonable notice period. The judge relied on previous court of appeal decisions in which shareholder agreements gave employers the right to buy back departing executives’ shares upon termination of employment.

In sharp contrast to the trial judgment, the appeal court decided that the company’s right to value and buy back Love’s shares was triggered on the termination date. This significantly impacted Love. He was unable to realize on the significant increase in the value of those shares between the termination date and the end of the nine-month notice period.

The appeal court focused on the specific language of the shareholder agreement. It said that nothing in the agreement permitted Love to hold onto his shares past the actual termination date. The court distinguished Love’s case from previous decisions based on the language contained in the shareholder agreement. According to the court, it was clear that Love “ceased to be employed” on the date of termination.

Importantly, the court of appeal specifically acknowledged that, had Love been given  working notice instead of pay in lieu, the trigger date for selling the shares back to the company would have been at the end of the working notice period. In this sense, the employer was actually better off having terminated Love without any notice whatsoever.

In many ways, the stars had seemed to be aligned for Love — a lengthy notice period and an equity stake in a successful business. However, the court’s decision tells us that contract language matters. This is not to say that a similarly worded policy will trump in every case but rather that carefully drafted language might tip the scales in cases where the facts are supportive.  See Love v. Acuity Investmentstrial court and appeal court.

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