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Shareholders Agreement and Family Law

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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.

shareholder agreements & family law

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 provides a waiver of any claims to the shares of the shareholder or a waiver of any right to information respecting the corporation, together with a certificate of independent legal advice.

Realistically, obtaining such documents are frequently not possible. Therefore, an alternative is to ensure the Shareholder Agreement requires the sale of the shares of any shareholder in the event of an application or proceeding is brought by or against that shareholder under the FLA.   In such event, 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.

If the family law claims do affect the shares (in other words, the spouse is making a claim to the shares), 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. 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 partner’s ex-spouse.

The Lesson

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.Q’s:

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, Hons BA, LLB | Associate Lawyer 

© Kalfa Law, 2020

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.

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