Shareholder Agreements and Family Law

Shareholders Agreement and Family Law

Interplay Between Family Law Act and Shares in a Private Corporation

Many shareholders are concerned that matrimonial conflict may destabilize the shareholdings of a corporation. How can a Shareholder’s Agreement be written to ensure that a spouse of a shareholder does not receive shares as part of an equalization provisions under the Family Law Act (FLA)?

Under the Family Law Act (FLA), shares in a corporation generally form part of a spouse’s net family property. In order to satisfy equalization or support obligations, a court could order a spouse to transfer shares in a corporation to the other spouse.

This could inevitably result in unwanted business consequences and/or cause friction with the existing shareholders who may object to the forced intrusion of a new shareholder who has no connection to the operations of the corporation. Note however that the provisions on equalization under the FLA do not apply to common-law spouses.

What Can a Corporation Do to Prevent This?

It is crucial that care is taken at the time a shareholder agreement is prepared to ensure that the spouse of each participating shareholder provide a waiver to any claims to the shares themselves or to the right to information respecting the corporation, together with a certificate of independent legal advice.

This does not mean that the spouse has waived her rights to the value of the shares as guaranteed under the provisions of equalization under the Family Law Act. The key is to ensure the shareholder’s agreement protects the corporation, shareholders and creditors, while adhering to provisions guaranteeing the rights of spouses under the Family Law Act.

Realistically, obtaining such documents are frequently not possible. Therefore, should a spouse of a shareholder file an application or begin proceedings against a shareholder under the Family Law Act, the shareholder involved would be required to provide satisfactory evidence to the other shareholders, within a fixed period, that the claims being asserted in the proceedings shall not affect, encumber or interfere with that shareholder’s shareholdings.

The Shareholders Agreement should have a provision, which enables the corporation to redeem the shares or transfer the shares to another shareholder at its fair market value. The shareholder, whose spouse has filed an action for equalization, will be paid its equivalent value, ensuring that his/her spouse will receive the value of the shares in monetary form, but not the shares themselves. As a result, the remaining shareholders of the corporation will not be forced to be in business with their partner’s ex-spouse.

The Lesson: The Shareholder’s Agreement is Key

A shareholders agreement can provide many solutions and protective measures in an event of a marriage breakdown. However it is important to note the one cannot contract out of the equalization provisions in a shareholders agreement; this is reserved for the domain of a marriage contract only. In other words, a shareholder’s agreement can indicate the value of the shares that are to be given to the spouse instead of the shares themselves, but only a marriage contract (sometimes called a prenuptial agreement) can cause the spouse to sign away his or her rights to the value of the shares.

F.A.Qs:

Under the Family Law Act, are shares in a corporation considered to be a part of a spouse’s net family property?

Yes, the shares in a corporation generally form part of a spouse’s net family property. In order to satisfy equalization or support obligations, a court could order a spouse to transfer shares in a corporation to the other spouse. This could inevitably result in unwanted business consequences and/or cause friction with the existing shareholders who may object to the forced intrusion of a new shareholder who has no connection to the operations of the corporation.

How can a corporation protect itself from a having its shares transferred to shareholder’s spouse, pursuant to the Family Law Act, in a situation where the shareholder is experiencing matrimonial conflict?

In order to protect itself in the event of a spouse applying for shares pursuant to equalization of net family property under the Family Law Act, a corporation can have a shareholder agreement that includes certain provisions. This might include requiring spouses of shareholders to provide a waiver to any claims to actual shares and the right to information respecting the corporation, together with independent legal advice. More commonly, however, the Shareholders Agreement should stipulate that the shares of any shareholder will be sold, redeemed or transferred to another shareholder at fair market value in the event of an application or proceeding brought by or against that shareholder under the Family Law Act. This will ensure that the spouse receives the value of the shares in monetary form, but not the shares themselves. In other words, the spouse is paid out its equivalent value and the remaining shareholders of the corporation are not forced to be in business with their partne’rs ex-spouse.

-Ghazal Hamedani, Associate Lawyer

Ghazal’s practice is focused on corporate-commercial law, including business formations, corporate reorganizations, shareholder agreements, commercial contracts, the purchase and sale of businesses, as well as secured and unsecured lending transactions. After graduating from University of Toronto with distinction, Ghazal completed her law studies with honours at Cardiff Law in 2017. Ghazal is a lawyer licenced to practice law by the Law Society of Ontario. She is also a member of the Canadian Bar Association and Canadian Corporate Counsel Association Ontario.

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.