In my last few blogs I’ve focused my comments on succession planning topics for business owners. I’d like to continue with that theme by reminding business owners and their advisors about the need to ensure contractual arrangements that are intended to attach to property, are addressed and worked into the business owner’s Will plan. I recently had the need to consider certain provisions in a shareholders’ agreement that prohibited the transfer of shares of a corporation to persons outside stated categories. The matter reminded me of the decision in Frye v. Frye Estate (2008) ONCA 606.
The opening words of the Court of Appeal aptly set the stage for the context of Frye v. Frye Estate: “This is another saga of siblings fighting for control of the family business after the death of their father. In the words of the trial judge: “[t]he Frye siblings…feuded constantly over the years, aligning with each other at various times having regard to disputes between them.”
The issue in this case was the relationship between a shareholder’s agreement and a Will. The question addressed by the Court of Appeal was whether a bequest of shares to a beneficiary under a Will is voided if a shareholders’ agreement, entered into by the decedent owner of the shares, prohibits the transfer of shares? In other words, can a shareholders’ agreement restrict the testamentary freedom of a shareholder vis a vis the disposition of his or her shares?
The facts involved five siblings holding shares in a family company started by their father. The five siblings entered into a shareholders’ agreement which contained restrictions on the transfer of shares. The restrictions imposed prohibited any transfer except in accordance with the agreement. This then indirectly required board approval for any transfer and otherwise limited sale transactions to a right of first offer to the other shareholders.
One of the siblings bequeathed his shares to his sister. A brother brought an action challenging the validity of the gift. At trial, the Court held that the gift to the sister was null and void because it was prohibited by the shareholders’ agreement. An order was made to sell the shares in accordance with the agreement. The sister appealed.
On appeal, the Court of Appeal overturned the decision by holding that contractual obligations do not constrain a person’s ability to bequeath property by means of a will. If a party breaches their obligations through testamentary gifts, this may give rise to an action for breach of contract but does not affect the validity of the Will itself. Pursuant to corporate law, the executors are entitled to become the registered title holder to the shares, but holding them in trust for and on behalf of the named beneficiary. Where there is a shareholders’ agreement in place, the executors are bound by the shareholder’s agreement and cannot distribute the shares out of the estate without complying with the terms of the shareholder’s agreement. The inability to transfer the shares immediately does not, however, render the bequest to the named beneficiary of the shares void.
Often clients and advisors may not recognize the need to consider and address contractual obligations into a Will plan. Sometimes the spectre of added costs that may result from engaging in this exercise is the reason for not doing so. Re-reading this case proved to be a useful reminder of the complexity that can arise when contractual obligations that impact property are not fully and thoughtfully considered at the planning stage. Given the matter went to the Court of Appeal, I suspect any perceived cost savings of not addressing the shareholders’ agreement at the planning stage, were undoubtedly overshadowed by the litigation costs incurred by all the parties.