The Decision of Frye vs. Frye - Hull on Estate and Succession Planning #152
Listen to The Decision of Frye vs. Frye.
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss the decision of Frye vs. Frye. In this case the court of appeal struggled with two competing documents. This created problems because there was a will issue that did not match up to the shareholders agreement that was created.
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The Decision of Frye vs. Frye - Hull on Estate and Succession Planning #152
Posted on February 18th, 2009 by Hull & Hull LLP
Welcome to Hull on Estates and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag. The podcast you’re listening to 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 152 of our podcast on Tuesday, February 17, 2009.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hello there Ian.
Ian Hull: So please don’t hesitate to look at our daily blog at estatelaw.hullandhull.com.
Suzana Popovic-Montag: And we always welcome your feedback or any comments you might have at hullandhull@gmail.com.
Ian Hull: So Suzana, we’ve been covering pretty intensely this whole question of shareholders’ agreements and its role in possibly passing on the company without bumps and bruises to the next generation.
Let’s talk today about a case that we’ve also talked about on Hull on Estates, because I think it provides a good concrete example of what are some of the questions and some of the issues that the Courts have been struggling with. And it’s a fairly recent decision. It’s the decision of Frye vs. Frye Estate. And the Court of Appeal of Ontario struggled with the two competing documents. And we talked about this in our last podcast in that if we don’t have a global estate plan and that we have competing documents that don’t reflect the intentions of the other, we can create problems. And the Frye vs. Frye Estate was just that, because we had a Will issue that didn’t exactly match up to the shareholders’ agreement that was created. So the Court struggled with that and came up with some solutions.
The facts in the Frye decision are fairly straightforward. There were a group of children, a father who had created significant wealth and wanted to pass that wealth down. He was careful right from the start to have fairly restrictive provisions in terms of how shares would be distributed and sold within the company, to keep it very tight. It was initial Articles of Incorporation and so forth that created restrictions on the sale of shares and the distribution of shares.
In his Will, he provided that the estate would be divided equally amongst the children. So that made sense. It dovetailed into the transition and it made good sense. Factually it got a little complicated but the bottom line was this - is that father’s capacity diminished and the children quite properly sort of restructured things all in the same theme of what the father wanted, equal distribution of the shares and created a shareholders’ agreement.
Suzana Popovic-Montag: And then the difficulty arose as you know from the fact that one of the children had actually passed away after the Dad had died and he left in his share a provision whereby the shares of the family corporation that he was entitled to and that he owned were going to go on to just one of his siblings. And so another of the siblings was very upset about the fact that suddenly this closely-held family corporation was no longer going to be equally shared and owned by all these siblings and so decided to challenge the Will.
Ian Hull: And what…yeah, because the father had distributed the shares. The shareholders’ agreement had distributed them equally. The father’s estate distributed them equally. And now there was going to be an unequal balance. And so the question that arose was whether or not by Will the child, who unfortunately passed away after the father, far too young in terms of the order of life, and that child had passed on his shares to a sibling creating this imbalance. The Court was asked whether or not the shareholders’ agreement, which was restrictive in terms of how shares should pass on generations, prevailed over the Will of this child who had passed away. And the provisions of the shareholders’ agreement basically set up a linear descendancy as best it could, and that was try to keep cylinders of the families together and then pass on to generations within the family, not add on with the one generation, that’s the generation of children, and create maybe a bit of a mini power base there. But the problem was that in this child’s, who had died, will it wasn’t uncommon for someone to give his shares to a sibling either.
So the Court sat down and said look, let’s look at the Will of this child and can they, do they have a right at law to pass on these shares? Well, yes they do. You can do what you want on your Will generally speaking. But then they came and cross-referenced it at the trial at the Division level and said how does that right get impacted or is it restricted? Is your right to pass on your shares restricted by virtue of the shareholders’ agreement?
Suzana Popovic-Montag: And the Court really did distinguish between this testamentary freedom that we all presume we have in our Wills with the contractual obligations. Because I think we can fairly say that the Court viewed it as a contractual obligation not to distribute the shares of the corporation differently than was provided for in that agreement.
Ian Hull: Absolutely. So with that struggle, the Court, at the first instance, came up with the decision essentially that indeed the Will could not prevail. That the shareholders’ agreement was a contract entered into by all the parties prior to death of the deceased and they were stuck with the deal. So you had to pass them on lineally as opposed to across the board.
The Court of Appeal sat back and said wait a minute, we’re not sure we agree with that, and came up with a very careful analysis on this, reflecting in large part on the statutory provisions that governed the passing on of assets generally. And the Court reminded us that an executor is in the shoes of the deceased and can and shall distribute with testamentary freedom prevailing, as the Will provides.
So in the course of that we learned that both the Courts’ bias is, I think, clearly to enforce these shareholders’ agreements if we can, but they won’t be overwhelmed by these contracts if you have done it properly in the Will. And the Court kind of left it ultimately in a bit of a perplexing situation because the corporate governance didn’t allow for the transfer, but the Will allowed for the transfer. So the Court said, you can transfer those shares to your sibling. You can create an extra power base. But we’re not sure how you’re going to do it on the governance side. We’re not going to tell you how you’re going to do it because your shareholders’ agreement reflects some conflicts with the mechanism. And so it was an interesting result because the mechanism was sort of left open. And the Court couldn’t help with that.
So the final lesson, I think, that we come from is that the Court’s going to first of all scrutinize these shareholders’ agreements very carefully and are going to uphold those provisions as best they can. They’re not going to get overwhelmed by them. The Wills are going to be important and they’re going to be properly done, and are going to in this case prevail. But the Court will not fix the problems for you. And if you’ve created internal problems, in this case, the ability now to transfer the shares because the shareholders’ agreement won’t allow it, the mechanism is not going to be solved by the Court. So it was a really interesting result because (a) it allowed us to see how the Courts are going to treat these shareholders’ agreements with respect and dignity; same with the Will. But they’re not going to solve all your problems. So the litigation itself, which was a strenuous piece of litigation, you were at two levels of Court in Ontario, at the trial division and at the Court of Appeal. That stress and that ultimate cost to the family, both financially and emotionally, actually didn’t even get entirely resolved by the Court because it couldn’t. And we’re not blaming the Court but it simply couldn’t resolve that internal detailed corporate technicality that was created.
So anyway, I think that that is a good point to wrap up our discussions on the shareholders’ agreement. I think its been, you know, as I say, a useful exercise to look at (a) what these are about, what are some of the core expectations that we’ve got to look to and where they’re helpful; and then (b) wind this up with looking at the Frye decision to say how is the Court been dealing with these things and how will it deal with these things?
And I think our next natural progression will be to let’s look at some estate freezes and they’re another classic remedy and a classic use in the succession planning. So we’ll move on to that and thank you very much for today.
We’ll remind you please to e-mail us at hullandhull@gmail.com.
Suzana Popovic-Montag: And feel free to visit our daily blog at estatelaw.hullandhull.com. And for those of you who are interested in looking at the Frye decision, we’ll include a reference to that in our show notes.
Thanks very much Ian.
Ian Hull: Thanks Suzana.
You have been listening to Hull on Estates and Succession Planning by Ian Hull and Suzana Popovic-Montag. The podcast that you are 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.
