Shareholders’ agreement should account for divorce
When it comes to protecting a business from a triggering event such as a marital breakdown, it’s worth reviewing the different approaches when drafting a shareholders’ agreement, says Toronto corporate lawyer Anton Katz.
If a shareholder gets divorced, their ex-spouse may make a claim for their shares, says Katz, principal of Anton M. Katz Barrister & Solicitor.
“In the event of a marriage breakdown, a couple enters into an equalization of their net family property (NFP) under Ontario’s Family Law Act,” he tells AdvocateDaily.com. “Essentially, when two people get married, each spouse becomes automatically entitled to an equal share of the profits of that marriage.”
If one person owns shares in a corporation, that’s considered family property and is part of the equalization process, Katz says.
“While unlikely, a court may find the shareholder has to transfer some or all of their shares to their ex in satisfaction of the NFP calculation equalization,” he says.
Katz says other shareholders generally want to do business with the person they know as opposed to their ex-spouse, who may be a stranger and lack the requisite business knowledge and expertise to become part of the corporation.
“The other shareholders want to have the right to prevent an ex-spouse from becoming a shareholder through equalization, so the shareholders’ agreement can contain a pre-emptive clause that, in the event of a divorce, the remaining shareholders have the right to purchase the shares,” he says.
While it’s beneficial to have this type of clause, Katz warns it doesn’t stop someone from making a claim to their ex’s shares in a corporation.
“While a court will strive to equalize the NFP by way of payment of money, it’s possible that the court could find the spouse is entitled to their ex-partner’s shares regardless of what the shareholders’ agreement says,” he says.
“If you want better assurance that a shareholder’s ex-spouse will not make a claim then the couple should enter into a domestic or marriage contract, with each party seeking independent legal advice,” Katz notes.
In the event they divorce, the remaining shareholders can pre-emptively purchase the shares. However, he says shareholders may be unable or unwilling to purchase the shares, and the divorcing shareholder may not want to sell their stake in the corporation.
“If you have a domestic or marriage contract which says the ex-spouse will not make a claim, then there’s no need for the divorcing shareholder to sell their shares because they’re not upsetting the apple cart,” Katz says, noting that’s the real benefit of having a marriage or domestic contract.
“It’s business as usual, and now the shareholders don’t have to cross their fingers and worry that a court is going to award the ex-spouse shares in the corporation because they already signed off with the benefit of independent legal advice,” Katz says.
While this approach is much less intrusive to the corporation, Katz acknowledges that it may lead to a difficult or awkward conversation for a person to have with their spouse.
“I appreciate this is a delicate conversation to have with your partner,” he says.