In our most recent blog post, we discussed the importance of being able to review current and accurate corporate records when preparing an estate plan that involves shares of a private corporation. Re Rudderham 9 D.L.R. (3d) 492 illustrates the problems that can arise if restrictions on the transfer of shares are not known when the estate is being planned. In this case, the testator directed in his will that his beneficiaries be given the opportunity to purchase his shares in the corporation. He owned 90% of the issued shares and 90% of the voting shares. Not all of his beneficiaries were shareholders of the corporation. However, the corporation`s Articles of Association stipulated a right of first refusal (the “Right”) in favour of the existing shareholders. Thus, with respect to the testator’s shares, the Right effectively blocked the instructions in the will from being carried out.
As is common amongst business owners, the testator wanted to ensure that certain of his children be given the opportunity to acquire his shares and that all of his children inherit equal value. In furtherance of his intention, the testator could have removed the Right from the Articles of Association while he was living but had not done so. The court concluded that the removal of the Right would have been a valid corporate action and the minority shareholders could not have prevented it from taking place. Now that the matter was before the court for resolution, the testator’s intention as outlined in the will had to also be considered in light of the executor’s obligations to the beneficiaries. In this regard, it was observed that the beneficiaries would receive greater value for the shares if the Right were not removed because they had increased in value since the testator’s death. As they could be sold to the existing shareholders at the increased value, the Court ordered that the Right not be removed.
This case is an example of the myriad of problems that can arise if the will drafter is given inaccurate information about share ownership. Another common scenario is where clients advise that they own shares directly for an operating business when, in actual fact, they own the operating business through a holding company structure.
The moral of these stories is that it is incumbent upon the will drafter to ask the right questions and to insist on reviewing the corporate records. However, the business owner is reminded that the effectiveness of the review process is critically dependent on the reliability of the corporate records.
If you wish to discuss how your share ownership will impact the options available regarding your estate plan, please contact Andrea Kelly.
*****
Andrea Kelly, Lawyer, has extensive experience in wills, trusts, powers of attorney and estate administration matters. She provides clients with a high standard of timely professionalism and expertise, incorporating a very thorough fact finding process. This is quite often enlightening for her clients and facilitates individually tailored services. If you would like to know more, feel free to use the easy contact form or read Andrea’s bio.