September 22, 2021
For many people, going into business with their spouse is a dream – who better as a business partner than your life partner? But what happens when that dream becomes a nightmare?
According to the case of Fuentes v. Camino Construction, the oppression remedy under the Ontario Business Corporations Act may be available to compensate an aggrieved spouse under some circumstances. The case does not consider how this integrates with Ontario’s comprehensive family law legislation (comprehensive, that is for married spouses). That raises some doubt as to the general availability of the oppression remedy between spouses, or its overall effectiveness, but awareness of the tool is still of interest unless and until courts, probably appeal courts, clarify the issue.
The Fuentes’ had founded the corporation in 2002. The wife ran the office, the husband handled bidding and operations. They were equal shareholders and each served as an officer and director.
Unfortunately, the marriage soured, followed by the business relationship.
In 2016, the husband incorporated a new corporation, called “2016 Camino”, with two long term employees as minority shareholders. The wife had no shares or role in 2016 Camino.
2016 Camino soon took over the business of Camino.
The husband claimed that this was necessary, because the wife’s lack of co-operation, he said, was making it impossible for Camino to continue operating. He was prepared to pay his wife one-half the value of Camino, but it of course was by then virtually worthless, while 2016 Camino was a profitable business.
The oppression remedy applies if the court is satisfied that the business affairs of a corporation are conducted in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any shareholder. It may lead to a range of remedies, from the winding up of the corporation to an order that the oppressor compensate the aggrieved party.
A director or controlling mind of the corporation establishing a competing business is often enough for oppression to be found. Add in the transfer of assets and customers to 2016 Camino, and in this case, it was easy for the judge to find that oppression existed. The real issue was the remedy.
It would be unrealistic for the wife to be made a 50% shareholder in 2016 Camino because of the lack of mutual trust.
Her reasonable expectation was to own 50% of the value of Camino prior to the creation of 2016 Camino. Therefore, the judge ordered a valuation of Camino as at December 31, 2015, and for either the husband or 2016 Camino to pay the wife the value of her shares as at that valuation date, plus compensation for fourteen months of lost wages.
If you enter into business with your spouse, you need to be aware that this possibility exists. Providing for the disposition of the management of the business on marriage breakdown in a shareholders agreement is one way to reduce the risk – a court may override the agreement in an oppression situation, but is unlikely to do so, as the agreement is solid evidence of the reasonable expectations of the aggrieved party.
Every privately held corporation ought to have a unanimous shareholders agreement, family corporation or not.