Fundamental business concepts that impact estate planning - Hull on Estate and Succession Planning #148
Listen to Fundamental business concepts that impact estate planning
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss some of the fundamental business concepts that impact estate planning. They also talk about the need to disclose and why that is important, using the illustration of the use of shareholders agreements.
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Fundamental business concepts that impact estate planning - Hull on Estate and Succession Planning #148
Posted on January 22nd, 2009 by Hull & Hull LLP
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag that will provide information and insights into estate planning in Canada. From the offices of Hull & Hull in Toronto, here are Ian and Suzana.
Suzana Popovic-Montag: Hi and welcome to Hull on Estate and Succession Planning. You’re listening, and some of you may be watching, episode 148 of our podcast on Tuesday, January 20th, 2009.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi there Ian. How are you today?
Ian Hull: Great thanks.
Suzana Popovic-Montag: That’s good.
Ian Hull: So don’t forget, please go to our daily blog at estatelaw.hullandhull.com.
Suzana Popovic-Montag: And if you have any comments or would like to provide us with any feedback, please feel free to contact us at hullandhull@gmail.com.
Ian Hull: Okay, we’re going to turn the corner a little bit here and talk about some of the fundamental business concepts that impact on estate planning. And also talk about the need to disclose and why that’s important. And the illustration we’re going to work with in the mini-series is the use of shareholder’s agreements.
So first of all, before we get into this, let’s talk about what is a shareholder’s agreement and why we would even concern ourselves with that as non-corporate, estate lawyers.
Suzana Popovic-Montag: Well Ian, a shareholder’s agreement really is a contract amongst the shareholders of a corporation that will provide for whatever it is that the parties want to actually provide for. And what typically we’ll see that it will provide for is how they will govern themselves, the shareholders, during their tenure as shareholders and how they might transition ownership of the corporation in the future if they so choose to do so.
Ian Hull: Now we are enjoying the joys of podcasting and we have a fair amount of noise in the background so I can assure you, it’s not in our building. But anyway we’re going to plow right through because this is podcasting and this is the third take of this podcast, so we’re not trying anymore. But anyway, we’re going to carry on.
And you raise a good point. I mean, really what we’re talking about is the contract that governs people during their lifetime as a shareholder. It often deals with the transition on death for sure. And quite frankly always should in that sense. But it’s an important document because it ties into the Will. And maybe not today, but in future podcasts, we’re going to talk about an estate case that went to the Court of Appeal recently that illustrates it perfectly, the case of Frye vs. Frye and its spelled F-R-Y-E.
But that’s just a great example of where the two very important documents dovetail in. Now why is it that we’re concerning ourselves with shareholder’s agreements in this day and age and in our practice?
Suzana Popovic-Montag: Well Ian, I think the reality is that so many times we’ll encounter estates that do have corporations. There are corporate interests and the reality is we’ve got to deal with the fact that people have interests that are held through corporations. They are either shareholders themselves, they’re officers, they’re directors of corporations and we have to address the reality that these are the kinds of estates that are meeting us on a day-to-day basis.
Ian Hull: Absolutely. And the other part of it I would say is, is that the shareholder’s agreement deals with the fundamental question of control. And control, obviously, is a fundamental issue in an estate planning scenario: who’s going to have control; who’s going to be in charge of the transition, and so forth. So as we sit back and look at the shareholder’s agreement, in some ways, it is the bellwether, the signal for either tension or no tension. And in other ways, it does trigger the opportunity to have a meeting, whether it is a formal family meeting that we’ve talked about in the past, or it’s a business meeting. And at that meeting, you need to, we think, give good disclosure because you’re going to be addressing control issues.
Suzana Popovic-Montag: And as you create a shareholder’s agreement as well, you can use that as basically an agenda for this kind of meeting.
Ian Hull: Right.
Suzana Popovic-Montag: So that all of the issues that you intend to address in the shareholder’s agreement are things that you can discuss, that you can disclose, you can discuss with one another so that there is an understanding about how the document and how the corporation is ultimately intended to be run.
Ian Hull: Absolutely. So now let’s turn to some of the mechanics of the shareholder’s agreement. And the nice thing is, we’re not corporate lawyers and we’re not tax lawyers. But we’re able to…we see these issues arise all the time. And so we want to spend some time in this podcast series picking apart a shareholder’s agreement, because like a Will, you sort of need to know the core aspects of it and what they’re dealing with.
The first thing that I want to say, though, is that I want to thank my good friend, Ted Pease, whose a lawyer practicing in Brantford, Ontario. And he’s been kind enough…over the years we’ve done a lot of work with him over shareholder’s agreement’s issues and so forth…and he’s created a little checklist that we’re working through. So we’re not going to miss a point that he raises but we also don’t want to be using material that isn’t entirely ours.
Suzana Popovic-Montag: That’s right.
Ian Hull: Because we’re pleased to get some guidance from an expert who can help us.
So one of the things that Ted talks about with his clients at the outset, and I’ve been there in those meetings, is that he wants you to understand the process. So let’s talk a little bit about the process and what we’re trying to achieve. And the first question he always asks his clients is…well, he starts the dialogue…he says let’s talk about the business, the business entity itself. Because that will, in and of itself, impact on what kind of contract we want to enter into.
Suzana Popovic-Montag: That’s right Ian. And that will really depend upon the nature of the business itself. If the company is what we see in many estates, just a holding company for instance where its just set up to hold investments for tax purposes then it will be different than an active corporation, for instance, that’s being run by family members. And so when we talk about control issues, when we talk about transition issues, depending on the nature of the business, I think that’s going to affect the nature of the shareholder’s agreement that’s going to be required and what kinds of things are actually included within that document.
Ian Hull: Its so true. And it is so fundamental. We’re going to hopefully in our next series talk a little bit about the new rules of identification that lawyers are expected to do. But this shareholder agreement process also allows us, we’ve got new expectations that we have to pull information out of our clients for money laundering and that sort of thing. But one of the things that I always…because of the new rules as well…is that I’m always alerted to is when I sit down with my clients, I want to really get a feel for the business. I mean, if it is just an investment portfolio, that’s one thing. But if there’s a widget component production, or there’s some active production to the business itself, then you really want to drill down. You need to know the details. And an easy way to do it is start to press on who are the officers and directors? What are the current arrangements for the management? Who’s signing the cheques for the operation? And so on. And you start to realize the nature of the business is X or Y and you craft your shareholder’s agreement around that.
Suzana Popovic-Montag: That’s right.
Ian Hull: Alright. So once we’ve got the legal entities and its maybe a business in its corporate form. It may be in some situations an LLP. There are very different scenarios in terms of what the entities are. But its important to lock down the entities and look at each entity and see what contract needs to overlay on each entity. So we may have several shareholder’s agreements, depending on the nature of it.
Suzana Popovic-Montag: Right.
Ian Hull: Alright. The next question that Ted says we should be doing is, is that we need to drill down on who the shareholders are.
Suzana Popovic-Montag: And that normally, in a closely-held family corporation, that’s pretty quick and something that you could identify quite easily. In a larger corporation it might be more difficult. And so identifying who the owners are because shareholders are effectively the owners of the corporation, who they are presently and who’d you like them to be in the future, I think, are key things that we want to keep in mind for the purposes of both the disclosure and the information-sharing process.
Ian Hull: That is so true and we really…it gives us a nice segway into that question, and that is, well, what happens if someone gets hit by a bus? Or what happens when so and so passes away? What is the balancing act that needs to be created? Are we going to allow the shares to go to one remaining sibling and the other and creating imbalances and things? Those are the kinds of questions that you are allowed to sort of drill down on and also look at the value of the shares. What are these values? I mean, are we talking about significant values? Are we talking about modest values? And that will again impact again on our drafting and so forth.
Alright. So what are the next sort of two areas that we need to inquire about. We want to just sort of introduce them as the concept and then in our next podcast, we’ll want to talk about them because they are so important.
Suzana Popovic-Montag: I think next to the shareholders, of course, the next most important players would be the officers and the directors of the company and that, as you say, have got to be identified with the same similar kind of issues that we talked about in terms of transition, control and power and how they’re affected in those particular positions as well.
Ian Hull: Great. Well that’s a good starting point for our next analysis because that became very important in the decision that we’re going to probably talk about in our next podcast, that’s the Frye vs. Frye. And we give a little plug because we did mention Frye vs. Frye in Hull on Estates. For a more legal analysis, please feel free to listen to that.
But for today anyway we want to again welcome you to give us your feedback at hullandhull@gmail.com.
Suzana Popovic-Montag: Or feel free to visit our daily blog at estatelaw.hullandhull.com.
Ian Hull: Thanks very much.
Suzana Popovic-Montag: Thanks Ian.
You have been listening to Hull on Estates and Succession Planning by Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current issues in estates and estate planning. It is not legal advice and you are reminded to always speak with a legal professional regarding your specific circumstance.
To listen to other Hull & Hull podcasts, or leave any questions or comments, please visit our website at hullestatemediation.com.
