Dividing Businesses after Matrimonial Breakdown

The end of a marriage can also terminate a successful business relationship. More and more often we see spouses with equal or almost equal interests in businesses separate. Not only do they have to resolve issues of parenting, support and division of other property, they have to determine how to divide a successful company.

In many cases, one party is the driving force behind the business. The other is simply a shareholder for the purpose of income splitting, playing no role in day-to-day operations. In those cases, it is only right that the active shareholder be left in control of the business in order to maintain its viability, thus creating income for that spouse and perhaps income from which he or she can pay support to the other spouse. The business, of course, will have to be valued and the fair market value of the business will be divided equally between the spouses subject to the provisions of The Family Property Act. (This can be accomplished by a payout over time or the amount being set off against the value of other property to be divided. Options for division and valuation methods will be discussed in a future article.)

There are many situations, however, where the spouses may be equally involved in the operation of the business, each performing key functions within the business. What then? Should one spouse buy out the shares of the other spouse? Should the business be wound up and distributed to the shareholders? Should the business be sold and the proceeds divided between the parties? Should the parties continue to share ownership despite the breakdown of their marriage relationship? It seems that many business owners have been able to resolve these issues on their own as there are few reported Court decisions. But what happens if none of these options are attractive to the shareholders, or they cannot agree on one of the options? They can, of course, put the matter before the Courts to make a determination.

One decision of note is Belman v. Belman (1995), 26 O.R. (3d) 56 (General Division). In this case, the husband and wife could not agree on one another’s involvement in their jointly owned company following their separation. Neither one was prepared to sell their respective hares in the corporation. Mrs. Belman was not prepared to continue to work with Mr. Belman; Mr. Belman was prepared to continue a business relationship and he felt the business’s success was greatly influenced by Mrs. Belman’s management. In addition to the divorce action, Mrs. Belman brought proceedings under the Ontario Business Corporations Act to wind up the company or to force Mr. Belman to sell his shares. (Saskatchewan’s Business Corporations Act has similar provisions).

Her application was not based upon an allegation of oppression, which we often see in shareholder disputes. Mrs. Belman simply asked the Court to do what was “just and equitable” given that there had been a change in the circumstances of the corporation not contemplated when the company was formed. There was a loss of confidence that the shareholders have a right to expect of each other and the loss of confidence was not caused by her. Mr. Belman opposed the application, and asked the Court to send the parties back to work out an agreement relating to the management of the business.

The Court granted Mrs. Belman’s application and ordered that Mr. Belman transfer his shares to Mrs. Belman at fair value. Not only was Mr. Belman entitled to fair value for his shares, he was also entitled to compensation for lost employment. He had been an active officer of the corporation but was being dismissed upon the transfer of his shares. There was no cause for dismissal, so he was awarded compensation equal to one year’s salary and benefits.

Courts must do what is just and equitable when faced with an application for liquidation and dissolution. The Court looked at the well-being of the corporate entity. Transferring shares to the most appropriate party allowed the business to again focus on long term corporate objectives.

The Belmans’ need to resort to the Courts could have been avoided with some careful planning at the time the corporation was established, or prior to their marriage being troubled. Either a Unanimous Shareholders Agreement or an Interspousal Contract could have defined the rights and obligations of the shareholders or the spouses upon a marriage breakdown. Instead, the parties faced a great deal of uncertainty in having the Courts determine their rights after separation, undoubtedly at great financial cost.