Canada: When Will An Employment Agreement Survive A Corporate Acquisition?

Last Updated: August 23 2013
Article by A. Irvin Schein

The recent decision of the Ontario Superior Court in Whittemore v. Open Text Corporation provides useful illustration of the rollercoaster ride that an employee might experience when his corporate employer goes through changes in its status.

Mr. Whittemore started work in 1994 with a small company called SoftArc Inc., as a software developer.

Five years later, SoftArc was taken over by another small company, MC2. MC2 had Mr. Whittemore sign an employment agreement at that time. It included a provision that on termination, an employee with more than 4 years service was entitled to 4 weeks salary in addition to the minimum statutory notice regardless of his actual length of service. It also provided for a sabbatical every 5 years.

Mr. Whittemore's salary and job functions did not change after the takeover. His years of employment with SoftArc were recognized in terms of his seniority. The company was listed on the TSX in March 2000 at which time its name was changed to Centrinity Inc.

In 2002, Centrinity was purchased by Open Text Corporation. At this point, a change was made to the sabbatical provision in the employment agreement which he had signed with MC2. Open Text informed the former employees of Centrinity Inc. that its corporate policy was not to provide any sabbatical so anyone intending to stay on with Open Text would have to agree to give that up. Whittemore did so.

As far as Whittemore was concerned, his employment contract with Centrinity was over and he had a new agreement with Open Text along the same terms except for the sabbatical. In all other ways, his job remained the same.

In 2011 Open Text terminated Whittemore's employment. He was given the minimum statutory notice together with a lump sum payment of 4 weeks' base pay, in accordance with his original employment agreement. By that time he had over 17 years of service which, at common law, would have entitled him to substantially more.

Whittemore sued for damages for wrongful dismissal. Open Text responded by insisting that Whittemore remained bound by the original employment agreement and accordingly, he had been paid all that he was owed.

A judge had little difficulty concluding that his employment agreement entered into with SoftArc continued to apply when it was taken over by MC2/ Centrinity Inc.

The more interesting question was whether or not that contract continued to be in effect after the takeover by Open Text.

The critical question on this point related to the way in which the takeover had taken place. Where a company taking over a business does so by purchasing shares, the law is clear that there is no change in the corporate identity of the employer and therefore no termination of employment. In other words, the result of an amalgamation through a share transaction is not the death of a company but rather its continuation in a new form. In this case, the Court characterized the Open Text transaction as an amalgamation with MC2/Centrinity. As a result there was no change in the identity of the employer and the existing employment contract continued.

The question of the elimination of the sabbatical privilege was discussed as well. The judge considered that it had been open to Whittemore to advise Open Text that its refusal to continue the sabbatical program constituted a breach of the terms of his employment contract and therefore a constructive termination. However, he did not do so. Instead, he agreed to the change and carried on as usual. As a result, he lost any right to complain about the loss of the sabbatical or insist that the original employment agreement had come to an end.

As Whittemore had condoned the change to the employment agreement by his conduct, the employment agreement remained in force and Open Text was entitled to rely on its termination provisions. This case highlights the importance of exercising great care when a person's corporate employer is acquired or in some way taken over by a new entity. An existing employment agreement may or may not continue to apply, depending on the circumstances. It also highlights the importance of being careful in the way one responds to a change in terms of employment. Accepting a change without taking the appropriate legal position may have unintended consequences down the road.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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A. Irvin Schein
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