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Nolan Wilson, Lawyer Waterous Amey Hitchon LLP

When Shareholders' Rights & Marital Rights Collide

Among many other things, marriage is an economic partnership. It should come as no surprise that this partnership often leads to both spouses playing a role in a family business. In the case of incorporated businesses, this can sometimes mean that both spouses own corporate shares.

What may be overlooked in such a situation is that, in the event of a breakdown of the marriage, a separating spouse who is also a corporate shareholder may have unique rights and entitlements which extend beyond the scope of Family Law and have significant implications for the corporation at large.

In the absence of special agreements like Prenuptial Contracts, a married spouse going through a separation under Ontario law is generally entitled to a division of the net value of property acquired during the marriage. All things being equal, if “Spouse A” holds 51 corporate shares and “Spouse B” holds 49 corporate shares, the readily-available Family Law remedy Spouse B can ask for is to be paid half the difference in the total value between the shares each spouse holds.

What recourse is there, however, if Spouse B no longer wants to own the 49 shares and instead would like to be paid a fair price to simply walk away from the corporation completely?

An emerging body of “hybrid” court cases suggests that a separating spouse who is also a shareholder may apply to the court for an order to “wind up” the corporation in the interest of fairness. Winding up a corporation is a remedy in which the business is essentially sold off and shareholders are paid out from the remaining assets. This option of last resort terminates business activities altogether and is fatal to the corporation.

Even if a court declines to order a winding up, it could still make a wide variety of orders as it sees fit, including imposing terms requiring one spouse to pay a specified price for the purchase of the other spouse’s shares.

If the situation were reversed, the court might also force an unwilling spouse to sell off his or her shares. A point of note, however: Corporations which take unilateral out-of-court actions to squeeze out a shareholder are exposed to liability risks by potentially engaging other legal rights which protect the interests of minority shareholders.

Whether planning to enter into a shareholder relationship with a spouse, or trying to get out of one, timely and effective legal advice can be instrumental in navigating the overlapping legal issues. The lawyers at Waterous Holden Amey Hitchon LLP can assist in resolving legal disputes when they arise or, better still, attempting to avoid disputes altogether through Marriage Contracts and Shareholders’ Agreements made well in advance.

When Shareholders’ Rights and Marital Rights Collide