Plugging Gaps In Unanimous Shareholder Agreements With Interspousal Contracts

When you sit down to discuss a Unanimous Shareholder Agreement (“USA”) with a certain corporate lawyer at our office, you are likely to hear “Just think about it. Do you really want to be in business with your business partner’s husband/wife?” You will probably answer no and your partners would likely answer the same. One of the USA’s most important purposes is to protect businesses against potentially devastating future events. A shareholder’s marital breakdown is such an occurrence.

Marital breakdown provisions can protect a business as a going concern by preventing former spouses from tying up assets and operations. Typical provisions specify that a shareholder’s divorce is an act of default under the USA, triggering mechanisms for valuation and forced transfer of the shares or business interest. The transition should be seamless.

Problems arise if you look at this option and think, “I don’t want the end of my marriage to be the end of my participation in the business,” or, “That business exists because of my blood, sweat and tears; I don’t want my spouse receiving a penny.” Either response may require you to consider additional protection. If you ask that corporate lawyer about additional options, she will tell you about Interspousal Contracts, which govern in the event of marital breakdown, and your ability to include directions in your Will to govern after death.

Is an Interspousal Contract really necessary if there is a USA? It can seem like overkill. The answer may very well be yes, however, and revising that Will might be a good idea too.

One problem with relying solely on a USA is the question of whether “default in the event of marital breakdown” clauses are enforceable against the defaulting partner’s former spouse. Absent a pre-existing Interspousal Contract respecting business interests or shares, both become marital property. They are therefore subject to the Saskatchewan Family Property Act’s property division regimes once the parties reach common law status or marry. This usually comes down to a calculation and division of value. However, if a former spouse were to challenge the forced transfer of a business interest in a USA on the grounds he/she is not a party to the USA, a Court might take issue with its enforceability against the former spouse. Depending on the facts, a judge could have room to decide the former spouse has the right to maintain an active interest in the business. The end result could be the former spouse becoming a shareholder. This is theoretical at the moment and not settled law. If nothing else, though, it creates uncertainty and the potential to tie up assets and/or operations pending determination.

Second, the purpose of the USA is to protect the business. While it can create an obligation to transfer share ownership, it does not address additional issues personal to the individual shareholder, such as whether the value of the interest is shareable under the family property regime and, if so, how it is to be divided. An Interspousal Contract can specifically exclude the business interest, including the increase in value over the course of the marriage (which is ordinarily shareable). In addition, just as the USA dictates timeframes and valuation mechanisms between shareholders, an Interspousal Contract can prescribe timeframes and the method of valuation between divorcing spouses. Much frustration can be eliminated when spouses agree in advance on reasonable methods of valuation and division because after a separation, sharability of the business, business valuation and the quality of appraisals become common sticking points on the road to resolution.

Interspousal Contracts are an important tool to protect business interests and determine parameters for division. There are additional benefits not discussed here but chief among them is the elimination of uncertainty and the ability to plan in advance for the high-conflict atmosphere of relationship breakdown.