In a recent Alberta decision, an employee filed a claim for wrongful termination, after he was dismissed from his employment as vice president of a drilling company and paid $1.00 for his shares in the company.
Employee Terminated and Paid $1 for Shares
In 2009, two privately held drilling services groups merged to create one company (the “employer” or “company”).
However, the merger did not progress smoothly at first, in particular with regard to accounting and financial statement issues. The president of the newly-formed company laid the blame for these issues squarely on the company’s vice president of finance and accounting (the “employee”). The employee had also been the controller at one of the merged companies since 2009.
Based on the president’s assessment of the employee’s role in the company’s issues, the employer fired the employee for cause. Additionally, the company’s directors determined that the employee’s conduct constituted cause under the terms of the Unanimous Shareholder Agreement (“USA”). The employee was a party to the USA as the holder of 1.48% of the common shares in the company. The directors further decided that the employee’s conduct was sufficient to trigger the penalty clause in the USA, which allowed it to purchase the employee’s shares for $1.00 on the approval of 100% of the shareholders. The relevant USA clause stated:
“In the event of dismissal for cause involving or relating in any way to any alleged illegal, fraudulent or criminal act of a serious nature that occurs in connection with the employment of the Shareholder or the Principal Shareholder of a Corporate Shareholder or otherwise causes or is reasonably likely to cause significant damage to the Company, AND one hundred percent (100%) of the Shareholders (other than the Withdrawing Shareholder) shall have unanimously agreed, the aggregate purchase price of the Shares shall be discounted to $1.00.”
The directors recommended to the other ten shareholders that they impose this penalty, and the shareholders unanimously agreed to do so. Accordingly, the employer cancelled the employee’s shares and issued him a cheque for $1.00.
However, the employee never cashed his one-dollar cheque. Instead, he commenced an action claiming he had been wrongfully dismissed. He further claimed that the employer had breached the terms of the USA by cancelling his shares and paying him $1.00. Finally, he claimed that the four directors of the company had acted oppressively, contrary to s. 242 of the Alberta Business Corporations Act. He sought compensatory, aggravated and punitive damages.
In response, the employer argued that it had cause to fire him, and that the cancellation of the shares fell within the terms of the USA. The employer and directors further denied that the directors had acted oppressively towards the employee and disputed his ability to hold the individual directors personally liable for what occurred.
Court Rules in Favour of Employee
The court explained that to dismiss an employee for incompetence, the employer must do more than demonstrate that the employee was careless or indifferent. Rather, it must show:
1) The level of job performance that it required and that the level required was communicated to the employee.
2) That it gave suitable instruction to the employee to enable him to meet the standard.
3) That the employee was incapable of meeting the standard.
4) That there had been a warning to the employee that failure to meet the standard would result in his dismissal.
Additionally, the court stated that the employer must also ensure that termination is a proportionate response to the employee’s misconduct.
In this case, the court held that the employer had not met its burden and had therefore wrongfully terminated the employee’s employment.
Additionally, the court held that the employer had breached its duty of good faith and honest performance in the manner in which it terminated the employee.
With regards to the terms of the USA and the employee’s shares, the court concluded:
“I find that [the employer] breached the terms of the USA when they took [the employee]’s shares for $1.00.The determination that there was cause was unreasonable on the facts. The directors who made the decision were not independent. Further, [the employee] had not engaged in an alleged illegal, fraudulent or criminal act of a serious nature so as to justify the appropriation of his shares, and nor had his actions caused, or risked causing, serious damage to the company.”
Finally, the court found that the company’s four directors had acted oppressively toward the employee and held that the employee was entitled to compensatory damages from the four directors personally, stating:
“[T]he manner in which the [directors] breached [the employee’s expectations under the USA] was oppressive and unfairly prejudicial to [the employee], and unfairly disregarded his interests. The false and misleading statements, the carelessness and indifference to the truth, and the recommendation to the shareholders that they direct [the company] to take [the employee]’s shares, was abusive and in bad faith. The consequences to [the employee] were unfair, breaching his legal interests as an employee and as a party to the USA. And, most of all, throughout the [directors] acted as if [the employee]’s legal interests, as an employee and as a party to the USA, were of no importance.”
In the result, the court found in favour of the employee. The employee was awarded $115,846 as compensatory damages for wrongful termination and $957,994 in damages for the loss of the shares, oppression and as compensatory damages for the breach of the USA. The court rejected the employee’s claim for punitive damages.
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