There is no one perfect way to protect your business interest when getting divorced. The best approach for each scenario may depend on a number of factors including:
- The structure of the business (corporation, partnership, sole proprietorship etc.);
- The level of involvement of each spouse in the business; and,
- The kind of relationship you expect to maintain with your spouse after the divorce.
Where you hold a business interest that is independent of your spouse, like being an active shareholder among a handful of others in a corporation, the kind of a shareholder agreement in place is important.
While it is extremely rare that a spouse would acquire your interest in a business where they are not a direct shareholder nor active in the business themselves, some corporations have clauses in their shareholder agreements to deal with such an event. These clauses dictate that a shareholder must surrender their shares to the corporation for cash if they become separated or divorced from their spouse. While this can provide comfort to the other shareholders, this remedy may be premature given the low likelihood that a spouse would obtain such an award for the Court in this context.
It may therefore be advisable to draft these kinds of clauses so that the buy-out remedy is only triggered once there is a final determination by a Court awarding an interest in shares to your spouse.
Of course, no matter how they are drafted, these buy-out clauses have their own drawbacks. Even if you retain a salaried position in the corporation like a Director or Officer, selling your shares often means losing your rights to share in company profits. This may be detrimental if you are relying on that profit sharing to supplement your income in retirement.
It is also important not to leave incorporating these clauses until the last minute. Courts tend to look unfavourably on large changes in the ownership structure of property and business interests occurring close to separation. Unless there was a reasonable explanation for doing so, it may be difficult to convince a Court that such a reorganization was not done for the express purpose of reducing the business interest of your spouse.
Where you hold an interest in a “family business”, like a corporation or partnership wherein your spouse is an active or passive partner, there are other considerations to account for.
When a spouse is a shareholder in a corporation, they will have access to shareholder remedies available in the Ontario Business Corporations Act and the Canada Business Corporations Act in addition to family law remedies. This is true even if your spouse only holds shares for tax purposes, which is often the case with holding companies.
Serious thought should be given toward either selling or retaining the business interest alongside your spouse in these situations. If you are a non active shareholder, it may be more logical to sell your business interest if your spouse’s involvement is indispensable to its operations and you anticipate being unable to work with them.
If you intend to retain the business interest alongside your spouse, it is a good practice to draft a new shareholder agreement or the like, concurrently with a separation agreement. This should enable you to define the parameters of your professional relationship with your spouse moving forward and create an exit strategy if that relationship ever becomes inoperable.
Regardless of your situation, it is advisable to consult with an accountant, business lawyer and other sector specialists alongside your family lawyer. The strategies you might otherwise use to avoid the tax man or protect yourself from creditors may not be line with the options suggested above.