Avoiding the perils of the company divorce
Advance planning can protect your business from fallout
Most Canadians know about Imax through the movies, thanks to its groundbreaking film projection technology. However, in its early stages of life, the company also set a precedent in the corporate law realm with a ruling on shareholder oppression that should give pause to any entrepreneurs who go into business together.
The company was founded in 1967 and the first shareholders were three couples. Each husband received 700 shares of common stock, while each wife received 700 shares of Class B non- voting dividend shares.
Unlike the other wives, Betty Ferguson, a film editor, took an active interest in the company and was one of the founders involved in the day- to- day administration of the business. The company struggled in its early years.
In 1972, Betty Ferguson separated from her husband, Ivan Ferguson, the company president, and they divorced in 1974. By then, Imax had found its financial footing and was profitable, but Betty Ferguson had been let go.
When Imax later proposed to cancel the class B shares and convert them to a different class of shares in a reorganization, Betty brought a minority shareholder oppression lawsuit, claiming her husband tried to squeeze her out of the company, and tried to get her to sell her shares during their separation negotiations, which she refused. She also claimed he put pressure on the other directors not to issue dividends on the Class B shares.
The Ontario Court of Appeal agreed and found in a 1983 ruling that “Mr. Ferguson set out to stop the payment because he did not want Mrs. Ferguson to share in the benefits in the growth of the company and wanted to force her to sell her shares to him or to one of the other men in the company.” The court ruled that Imax was prohibited from implementing the resolution.
The case highlights the perils of divorce on a business. With an estimated four out of 10 marriages in Canada failing, it reinforces the need for entrepreneurs to take steps to bulletproof their companies from marital meltdowns.
Tom Hunter, a corporate lawyer at Gowling Lafleur Henderson in Kitchener, Ont. added, “it’s a very real problem and you are rolling the dice if you hope that you are not one of the percentage that will go through a marital breakdown.
“It can do financial damage, because shares of a company would be part of the net family property that spouses are fighting over.”
Under family law, when couples split, they must account for their assets and one spouse will often be required to make an equalization payment to the other. Assets can include the value of a business, or even claims for half the shares.
Marital breakups have far- reaching effects on a business.
A major problem is trying to figure out what a company is worth, especially if its pre- revenue. That often leads to costly fights over valuation. Moreover, the other owners can quickly find themselves in business with a spouse they never intended to have as partner.
For example, in a divorce, company shares could end up in the hands of the spouse that’s not involved in the business. As a shareholder, that spouse will have all sorts of rights. He or she may be able to obtain a board seat or have a say in appointing company auditors, and be entitled to financial information.
The most important thing owners can do, Hunter said, is to have a shareholder agreement in place that allows the other shareholders to buy the shares at fair market value in the event an owner experiences a separation or divorce.
An agreement can include restrictions on spouse’s owning shares, so that in the event of a divorce, the shares stay in the hands of the founder. Toronto family lawyer Nathalie Boutet, at Boutet Family Law, suggested business owners considering marriage should prepare a pre- nuptial agreement.
“While it sounds calculating, it’s actually very honest and very up front. That’s the best way to protect your wealth.”