Today’s blog is authored by Chigozie Enwereuzo, Student-at-Law at Hull & Hull LLP

There is a growing trend by owners of very successful businesses in Canada to pass on their business and the wealth that came with it to their next generation by way of an estate freeze. An estate freeze is an estate planning strategy that involves “freezing” the value of the owners’ current shares in the company and allowing the next generation to participate in the future growth of the company. It is also an asset management strategy by which the estate owner seeks to transfer assets to those beneficiaries without tax consequences.

This well-intentioned desire to use the estate freeze planning tool to keep the acquired wealth and success within the family through the next generation and avoid a huge tax burden has sometimes blindsided estate owners to the full legal implications of this strategy.

In some estate freeze plans, the estate owner, using a holding corporation as the freeze vehicle, gifts his children with common shares of his business in exchange for preferred shares. What may not have been considered at the time is the irrevocability of those gifted common shares which confer shareholder status to the children.

With children acquiring minority shareholder status, the estate owner (a parent or close relatives) may lose the independence and control previously exercised in his sole shareholder business entity. This situation becomes especially evident when an unanticipated family strife leading to disunity arises in the future, post-estate freeze. Corporate decisions and actions that could have been implemented solely by the owner without recourse to anyone suddenly become subject to the new shareholders’ scrutiny.

The right of minority shareholders to scrutinize corporate decisions is provided for by some common law and statutory doctrines. One example of such a remedy is the Oppression Remedy in Canadian Corporate Law. These doctrines do not generally acknowledge the fact that a minority shareholder disputing the actions taken by a business obtained his or her shareholding through a gift. As a result, the estate owner soon realizes that the business, subject of the estate freeze, no longer belongs to the owner.

The facts of the case: 820099 Ontario Inc. v Harold Ballard Ltd. (1991) 3 B.L.R. (2d) 113 (Ont. Ct. (Gen. Div.)) concerned a minority shareholder who obtained that status by virtue of his father’s gift under an estate freeze and decided to seek remedies under the oppression doctrine when relationships soured. His father, Harold Ballard, froze his estate in 1966, and gave his three children non-voting common shares of his holding company, while retaining voting control. At the time of the freeze, his shareholding was worth about $3M. By the late 1980’s, the value of the children’s’ shares had increased dramatically to about $60M.

When at some point, his relationship with his family deteriorated, Harold took steps to reacquire his children’s shares. In 1989, he purchased his daughter’s shares for about $15.5 M and one son’s shares also in 1989 for about $21M. However, his third child, William Ballard, refused his father’s offers to purchase his shares.

The corporation was re-organized, and a share issue occurred to finance the purchase of the children’s shares, and to ensure Harold’s control over the operating company, Maple Leaf Gardens. As a result, William was “frozen out”.

William brought an action to nullify the re-organization on the basis that it was oppressive conduct. The court held that in effecting the re-organization, the directors had acted for an improper purpose, that they acted only in the interests of the majority shareholder, and that they did not consider the interests of the minority shareholder. As a result, it set aside the re-organization.

Thank you for reading.

Chigozie Enwereuzo, Student-at-Law