For many people, owning a successful family business can be a dream worth pursuing, especially if the business turns out to be a great success. With that said, a family business is a source of stress if the owners of it are married but decide to divorce or separate. A business might lead to issues around complex property and asset division.
A recent decision from the Court of Appeal for Ontario shows what the court might consider when married business owners separate and one is terminated from the business they created together. It raises questions of how the business should be divided, and if one spouse no longer works there, what are they entitled to?
Married couple creates very successful business
The parties involved were married in 1992 and separated in the fall of 2010. In 1998 they created a business (“MM”) which made specialized sensors that could precisely measure the earth’s magnetic field. When MM was incorporated, the husband was issued 70 common shares, the wife was issued 20, and a third partner was issued 10. The third partner resigned in 2000, and his shares were transferred to his wife. For several years afterwards, the parties were the only employees of the business and worked together to build it into the success it became.
The wife continued to work for the company even after she and the husband separated. The husband is a geophysicist and engineer and served as the company president. While employed there, the wife served as the company’s secretary. Even after the separation, they continued to pay themselves equal compensation and divided dividends from the company equally.
This arrangement lasted for five years following the separation until March 2, 2020, when the husband terminated her employment without notice, stating it was for cause.
During the original trial, the judge ordered that the husband purchase the common shares of the company held by the wife. While she only held 30 per cent of the company’s shares, she told the trial judge that they agreed that she would always be a 50 per cent owner and that documents to formalize that agreement were drafted but still needed to be executed.
The trial judge believed her and ordered the husband to buy her out at 50 per cent ownership. The company was valued at $10,800,000, meaning the wife was entitled to be paid $5,400,000 for her common shares.
The husband appealed the trial judge’s decision, stating that the trial judge made an error by concluding that they each held equal shares of the company and erred in the business valuation.
Should the wife be considered an equal shareholder?
The husband’s position was that there was no legal basis for the trial judge’s determination that the wife was entitled to 50 per cent of the company’s common shares. He referred to the shareholder agreement, which stated she only owned 30 per cent compared to his 70 per cent.
The court said it was not persuaded by that argument, though. The trial judge accepted the wife’s position that the husband had agreed to give her enough shares to bring her ownership to half. The court said that the corporate records alone are not enough to rebut the wife’s position, adding that the husband had agreed to transfer her shares but failed to follow through on that promise. The court also noted that even though the parties were involved in other family law matters related to their children, the wife did not pursue equalizing net family property specifically because she believed she was a 50 per cent company shareholder.
Finally, the court noted that the trial judge also considered that dividends had been split equally, which suggested that the parties considered themselves equal shareholders.
The court also heard the husband’s argument that the trial judge had not properly valued the company’s shareholdings. Still, the court concluded that the judge had two expert opinions to consider, and their decision to side with the one testifying on behalf of the wife cannot be considered an error.
The husband was ultimately unsuccessful in overturning the trial judge’s decision.
Contact Windsor Family Lawyers Howie Johnson Barristers & Solicitors If You Are Going Through A Separation And Have A Family Business
For anyone who owns a business, even if it is not owned by both parties to a marriage or relationship, valuing the business is an essential step in the process you’ll take to divide your matrimonial property.
Our experienced family law team has represented numerous business owners and is extremely familiar with the process taken to value a business properly. We also work with financial professionals to ensure that any valuation placed on a business is realistic.
As you can see in the case we discussed today, when spouses own a business together, significant issues can arise during the separation or divorce process.
Some things to consider are whether or not you and your spouse want to continue to be shareholders. If not, decisions must be made about who will assume operational responsibility for the business. You need to ensure you are working with a family lawyer who is familiar with these situations and can help guide you to a resolution that meets your needs while considering business valuation and dividing business assets during divorce.
Call 519.973.1500, or contact us online. Many of our clients are referred to us by former and current clients, lawyers, accountants and other professionals.