The Estate Freeze – Part 2 – Hull on Estate and Succession Planning #154
Listen to The Estate Free – Part 2
This week on Hull on Estate and Succession Planning, Ian and Suzana continue their discussion on Estate Freezes and discuss the rights that shareholders have.
If you have any comments, send us an email at firstname.lastname@example.org or leave a comment on our blog.
The Estate Freeze – Part 2 – Hull on Estate and Succession Planning #154
Posted on March 3rd, 2009 by Hull & Hull LLP
Welcome to Hull on Estates and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag. The podcast you’re listening to will provide information and insights into estate planning in Canada. From the offices of Hull & Hull in Toronto, here are Ian and Suzana.
Suzana Popovic-Montag: Hi and welcome to Hull on Estate and Succession Planning. You’re listening to episode 154 of our podcast on Tuesday, March 3rd, 2009.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian, how are you today?
Ian Hull: I’m just great, thank you.
Suzana Popovic-Montag: That’s good.
Ian Hull: All is well.
Suzana Popovic-Montag: That’s great.
Ian Hull: So why don’t we continue on with our discussion about the estate freeze and the unique characteristic of it because I think what is going to help us lead to and that is the component of the trust component that we talked about earlier, in a future podcast we can start to develop the actual trust that we create in the context of the estate freeze. So we remember that the settlor, the head or the heads of the family has passed on the wealth by freezing the asset, holding onto the core base of the value of the company at the date of the freeze and allowing for the growth. And the growth in our illustration was into a trust. So we can explore what that means more about the trust. But first of all, let’s talk about what we promised we’d talk about in our last podcast. And that is, with these growth shares, what are these new shareholders going to be all about? And what rights do they have? And if they’re minor children, of course, what rights does someone who you don’t even know possibly going to be pursuing?
And we talked about, in the last podcast, concepts of wind-up, concepts of oppression remedy, concepts of the Business Corporations statute remedies and concepts of accountability.
Suzana Popovic-Montag: And you know, Ian, I’m just smiling because I’m thinking these concepts sound somewhat complicated to the average person but yet we do see a lot of estate freezes and they can be in corporations that are worth millions of dollars, or they can be in this closely-held, you know, mom and pop little corporation that is small enough but has made a significant amount of money that people do start planning for the tax consequences of that. And so whereas you would have a situation where dad was the patriarch and made all the decisions for the corporation, he didn’t have to account to anyone, things were fine as long as there was food on the table, no one had any questions or raised any issues, and things just moved on well. But once you get into this formalized corporate environment and you set up these arrangements, there are consequences that may come as a shock, for instance, to the individuals who are involved. So when we talk about the accountability, and talk about the fact that there has to be disclosure, some of the corporate concepts that we are alluding to are the fact that, for instance, you have to have annual shareholder meetings. You have to prepare audited financial statements that are provided to people…this is your family that in the past you may never have had to account to or provide any information to. So I think it just takes a little bit of a change in thinking when you’re in these environments.
Ian Hull: Well that’s true and what you’re essentially doing is, you’re professionalizing the family. And because of that, it brings with it its own tensions because the head or the heads of the family didn’t typically run the company probably that way. And now they’re having to professionalize this with their kids. And their kids can go out and hire their own lawyers who can send a letter under the Business Corporations Act, either provincially or federally, compelling an audit, or compelling a shareholder’s meeting to be attended to, or compelling disclosure of things like salary, things like what were the officers and directors getting paid. Those kinds of things are basic remedies that a new shareholder like that will have. And they are set out in statute and they are very powerful tools to keeping in check the whole balance of this. And you know, some people can address some of these issues through a shareholder’s agreement but there are some fundamental rights at law that you just can’t prevent.
Suzana Popovic-Montag: And overlay above that the family dynamics, that this is…it’s not just a business environment anymore. It’s a business environment with family members which adds a whole layer of complexity, I think, to the situation.
Ian Hull: For sure. So the other two components of these rights that we mentioned, well there are sort of three components. The accountability, and that is generally not just the financial statements but the accounting that needs to be undertaken and the right of a shareholder to maybe, you know, compel a disclosure of the general ledger or something like that, where we get into the real nitty-gritty.
The next component is that concept of oppression remedies, and the availability of a shareholder to take steps in that world, a separate world in and of itself.
Suzana Popovic-Montag: And that, Ian, is an interesting concept because we always sort of traditionally think about majority rules and has all the power and control. But under the statutes, both provincially and federally, as you say, there are remedies available to minor shareholders. So when you’ve got a minority interest, you still have rights and remedies available to you that you might not otherwise expect and those rights can be quite significant.
Ian Hull: Absolutely. And the rights of the minor, now we’re using that in the corporate sense now. We usually use it in the estates sense, the not under age but the shareholders who hold smaller interests in the company. The oppression remedy rights are typically pursued by a separate action against the officers and directors of the company and against others who may or may not be part of, say there’s a conspiracy theory or something that’s developed. But that in and of itself is a lawsuit and it’s a lawsuit where you are governed by the provincial or federal statutes, depending on what your corporation has been incorporated under. And you are claiming all of the additional rights that you would claim because you are saying that basically the majority is controlling you improperly. And that, of course, is something to someone who previously had run the company as he or she felt at will, can be a very disruptive piece of litigation. And private, personal matters get raised in the litigation and private and personal things get said in the litigation. So it can be very divisive but it is an important tool that is available, so that there is no true tyranny of the majority when you’re running a company.
Suzana Popovic-Montag: Ian, can you give some concrete examples of possible remedies that might be available when you pursue this kind of a remedy as an allegedly oppressed shareholder?
Ian Hull: Well, one of the remedies that ties into our last sort of comment is the right to wind-up the corporation. And the wind-up rights of a shareholder is the most draconian step available but one that, of course, brings with it powerful results.
Suzana Popovic-Montag: That was exactly the answer I was trying to elicit because it does show how powerful, as you say, this remedy is. So notwithstanding the fact that you may not have the majority interest, you can have quite an impact on the viability and continuation of a corporation.
Ian Hull: That’s right. And this kind of litigation is not something that is just about getting more paper pushed and disclosing and disclosing, although that’s a very important part of it, getting access to the business records of the company. The secondary aspect of it is this hammer, and that is the wind-up rights that could get instituted in the context of that litigation. Now when anyone starts one of these beautiful estate freezes and coming back to the happy time when we estate freeze, nobody talks about the disaster on the other end that could come about. And there are, of course, fundamental steps that can be taken to prevent those disasters, one of which is the organizing of the family dynamics through things like family meetings, full discussion, full understanding of the new shareholders. But also, of course, is the corporate and the legal overlay of things like imposing shareholder’s agreements into the process so that when we get to log jams or we get to disagreement points, it doesn’t result in what is the third step, and that is, typically aggressive, contentious litigation, corporate litigation. And we, of course, have seen that with high profile family businesses that have entered into this kind of disastrous piece of litigation. But although there is no quick fix, there are options available.
So I think that sort of winds up what we’ll call our sort of 30,000 foot summary of estate freezes. There’ll be some more discussion on that and as I say, we’ll develop some of the concepts of what we do with the trust arrangement once that’s been created, but thank you very much.
Suzana Popovic-Montag: Thanks to you, Ian.