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Sambrook v. Altamira Management Ltd.
Rights of employees to compensation for agreements to purchase shares or stock options after termination is often a point of contention between a dismissed employee and the former employer. Sambrook v. Altamira,  O.J. no. 2769, a recent decision by the Ontario Superior Court, is a case that highlights the court's willingness to uphold a share purchase agreement even when it was primarily based on an oral agreement and the documents were never executed. Moreover, it provides an informative description of the approach to determining the appropriate damages in employment relationships involving share purchase agreements.
Altamira Management Ltd. was a private company in need of a senior executive. To accept this position Mr. Sambrook turned down another job opportunity. After negotiations with Altamira, Sambrook drafted a letter of agreement reflecting the main points of the verbal agreement reached. It provided that Sambrook would have an option to purchase up to $1,000,000 in shares of Altamira at a favourable discount. The parties orally agreed that the discount was to be fifty percent. The purchase was to occur within six months, by means of an interest free shareholder loan with repayment terms and conditions to be established. Altamira failed to provide Sambrook with the documents to effect the transaction. After ten months, Sambrook was fired as a result of pressure from senior managers who were upset by Sambrook's having been hired without their participation. Altamira still had not provided the shares. Sambrook rejected a settlement offer respecting the shares in 1993, and took no further action until 1997.
In this action for breach of an employment agreement, at issue was whether there was an enforceable promise to make $1,000,000 of stock available to Mr. Sambrook at a 50% discount to market to be paid for by an interest-free loan supplied by Altamira
Decision of the Court
Despite the fact that the share purchase agreement had been reached orally, and only some of the agreement reduced to writing, the court was willing to uphold the agreement. Backhouse J. noted:
I find that the essential terms of the share purchase agreement were agreed to by the parties. Mr. Sambrook and Mr. Meade agreed that Mr. Sambrook would have the right to $1,000,000 in Altamira shares at a cost of half the market value as at the commencement of Mr. Sambrook's employment...
...I find that the remaining terms were not matters upon which negotiation remained but were matters which were covered in Altamira’s standard from documents such as the option agreement, loan agreement and the novation confirming acceptance of the shareholder agreement. I find that Mr. Sambrook, like the management employees who acquired shares before and after him, would have signed these documents if they had been presented to him (ibid, at paras 64 to 66).
As such, it was held that there had been an enforceable agreement between the parties granting Sambrook the right to purchase the shares. In upholding the contract, and finding the employer had breached it, Backhouse J. stated that Altamira could not avoid its promise to give Mr. Sambrook his shares by not presenting him with the documents and by then asserting that there were terms upon which no agreement had been reached.
Calculation of Damages
As in other cases dealing with the loss of stock options, or share purchase agreements, the court has to determine two primary issues to calculate damages. The first is to determine on what date the stock should be valued. The typical choices include: the date of dismissal, the end of the notice period, the time of trial or some other date specified by the court. The specific agreementat issue usually plays a role in this determination. The second issue is to ascertain how much profit was lost. Generally, the measure of damages will be the loss of the individual's right to sell the shares on the market. Therefore, damages will be the difference between the option or buying price to which the employee is entitled and the trading price on the date that the court determined the employee would have sold the shares.
Contrary to the situation with stock options, there appears to be a relatively long history of executives being able to claim damages for the breach of an agreement to buy shares. In Carey v. F. Drexel Co.,  4 W.W.R. 492 (B.C. S.C.), the loss of the option to buy an additional 65 shares was considered the proper subject of compensation, it being part of the contract of employment. Even though the plaintiff was required to sell his shares upon the termination of his employment, the value of the dividends on such shares during the assessment period was also considered proper damages.
A more recent case dealing with a share purchase agreement is the Ontario Court of Appeal decision in Heslop v. Cooper's Crane Rental Ltd., 30 C.C.E.L. (2d) 279 (Ont. C.A.). In that case the plaintiff retained shares following his termination but lost his right to redeem them under a share purchase arrangement. The court determined that this would be a component of damages in the wrongful dismissal claim. Specifically, the court commented as follows:
As an employee, he purchased a minority shareholder's position in a private company for a considerable sum of money. Employee participation in share purchase arrangements may form part of the employment contract...On his termination without cause and without adequate notice, Heslop was entitled to damages for this wrongful act. Part of those damages includes compensation for his minority shares which have now no value in his hands. In the unique circumstances of this case, Heslop should be compensated for the value of those
shares as of the date of his termination.
The court held that logically the date for valuation was that of dismissal. Since it was unable to determine the value of the shares the matter was sent back to the trial division for a ruling. Under a stock purchase plan, as is noted in Executive Employment Law, the date of breach is the normal rule for the assessment of damages (at p 13.21). In some cases, however, the damages may be determined otherwise. In Payne v. Memex Software Inc.,  B.C.J. No. 111, the plaintiff was seeking to enforce an agreement granting him the right to a 10% interest in the company. In that case the court allowed the executive to quantify his damages based on the equity of the company at the time of the judgement.
In Sambrook v. Altamira, once the court determined that there had been an enforceable share purchase agreement that was breached, it had to turn its mind to valuating the shares and the appropriate time to determine the damages to which Mr. Sambrook would be entitled.
In this case, the court was provided valuation evidence from a forensic accountant retained by Mr. Sambrook. Based on the facts of this case he was asked to give an opinion as to the value of Altamira's shares using three different scenarios representing possible valuation dates: scenario one assumed Mr. Sambrook owned the shares until Altamira was acquired in 1997; scenario 2 assumed that he owned the shares until Altamira's offer of December 1993; and scenario 3 assumed that he owned the shares until he was given notice of termination in July 1993. With respect to the loss or applicable damage, for each of the scenarios, the accountant calculated the sale of proceeds, added the dividends Mr. Sambrook would have been entitled to receive based on Altamira’s dividend history, subtracted 50% of the dividends assumed applied against the interest-free loan and subtracted the amount of the outstanding loan at the sale date to reach an amount of damages.
After accepting this expert evidence, the court then turned its attention to the determination of the appropriate date to fix the damages. Citing the earlier decision of Wright J. in Garbens v. Khayami, 17 O.R. (3d) 162 (Gen. Div.), Backhouse J. stated that in a contract of sale, the normal damages principle leads to assessment as at the date of breach unless this assessment would give rise to injustice. In concluding that there was no injustice based on the date of breach Backhouse J. noted:
The share entitlement was employment related and it was not within the reasonable contemplation of the parties that Mr. Sambrook would receive shares once his employment was terminated or that damages would be assessed later than at the termination of his employment (at para. 82).
Therefore, the court confirmed that the appropriate date for determination of damages was the date of breach. The reasoning behind this decision was stated to be that "at that date there was no prospect of his receiving the promised shares." (Ibid, at para 84). Based on this reasoning the court awarded Mr. Sambrook damages at that date estimated at $6,833,327 from the values suggested by the expert accountant before the court.
Originally published in the Executive Employment Newsletter – Volume IX, No. 1, 2002)