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Family shareholder fights highlight need for formal agreements

|Written By Daryl-Lynn Carlson

Shareholder disputes can become nasty and very public. But when the business is owned by a small number of shareholders from the same family, things can get ugly.

Such was the case with one dispute that ended up in court for three years before settling recently for close to $1 million.

“Shareholder disputes are really about power and money,” says Igor Ellyn, founding partner of Ellyn Law LLP who represented one of the family members in the dispute. “When a family is dysfunctional, there can be ways where the business is used as a weapon.”

The dispute involved a successful family manufacturing business founded by the father, who suffered a stroke in 1996.

The mother, along with the two children once they became adults, worked at the business. The son, whom Ellyn represented, was named the company’s president when the father was no longer able play an active role.

But things began to deteriorate when the son got divorced, then remarried to a woman the family didn’t like. On the eve of the wedding, the father named his daughter president of the company and eventually reduced the son’s salary and responsibilities.

Distraught, the son had an emotional breakdown and had to leave the business, which is when he retained Ellyn’s services.

“In this particular case, there were some family dynamics going on that drove the founders of the company, the elderly father and mother, to make decisions based on whether they approved or disapproved of my client’s contacts,” says Ellyn, who also used to practise family law before becoming a certified specialist in litigation with a focus on shareholder disputes.

He acknowledges that during a feud within a small family business, “you scratch your head about some of the ridiculous things that motivate people and prevent them from being reasonable.”

The lawsuit sought punitive damages and compensation for the son’s shares based on oppression, breach of trust, and breach of fiduciary duty. That’s because the father had demanded the son’s shares be returned.

During the matter, the daughter, in her role as president, was unco-operative in providing disclosure of the business’ finances. Ellyn also had to retain a team of experts to quantify the value of the business for the courts.

He says that with an allegation of shareholder oppression, there are a variety of recourses the courts can impose under the Ontario Business Corporations Act, ranging from ordering a mandatory shareholder meeting to ordering the company’s assets be split and divided up amongst the shareholders.

Most commonly, he says, an oppression remedy comes into play when the court determines that a shareholder is behaving in a way that prevents others from receiving their “reasonable expectations,” whether financial or behavioural.

“Reasonable expectations can be driven by law, a shareholder agreement, unreasonable treatment of a shareholder who’s also an employee or by breach of fiduciary duty.”

He says the oppression remedy is “one of the broadest areas of judicial discretion that judges have,” empowering them to resolve the matter by means that could range from directing one shareholder to buy the shares of another to ordering the company sold.

Intense negotiations finally enabled Ellyn’s client to recover the value of his shares, although the matter proved to be a messy battle.

“When the shareholders are also related, it can be about family feuds, inheritances, succession in the business or value for contribution,” he says. “The issues can be so complicated and expensive to litigate, and there’s so much he-said she-said that a lot of these cases settle.”

Such disputes usually involve thousands of documents. Sometimes, parties hire a private investigator to do surveillance if there’s a conflict of interest allegation.

Aaron Grubner, a partner at Minden Gross LLP’s corporate commercial law practice, has prepared a paper, titled “Addressing the Four Ds in Family Shareholder Agreements: Decisions, Death, Disability, and Disputes,” that addresses these issues.

He initially distributed the paper at a Canadian Institute business conference on succession planning, although its contents examine all types of family shareholder disputes.

“These days, family business succession planning is a hot-button topic,” says Grubner. “Everybody is discussing it, and everyone is concerned about it in planning the next generation succession for

businesses.”

In the four-page paper, he wrote: “In a family context, given that there are usually few shareholders initially, each with significant control, it is important that these shareholders agree on their respective visions for the corporation early on and implement an agreement governing its operation and growth.”

He added: “In addition, a shareholder agreement can provide for issues that may be particularly sensitive to the family, such as cultural and religious issues or devoting resources to specific charitable, communal or religious purposes.”

He cited one case, Pusateri v. Trozzo, in which a dispute within the family business erupted following the death of a shareholder. As the family had not drafted a shareholder agreement, the matter ended up in court over how to wind up and sell the business.

The judge in the matter ultimately ordered the business sold through a supervised auction.

“Had a shareholder agreement addressing this issue been in place, the sale process could have been contractually implemented and significant litigation costs avoided,” Grubner concluded.

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