Marriage Contracts for Company Shareholders

Often saying the words "pre-nuptial agreement" or "marriage contract" are sufficient to cause a potential spouse to reconsider any sort of life long commitment to you. Marriage, by its nature, is considered to be an economic, emotional and social partnership between two people that will last a lifetime. Contemplating the ultimate demise of the union between you and your significant other before the marital relationship has even started, tends to make the other person think that you are expecting this relationship not to work.

However, when you are a stakeholder in a business entity, the protection of the corporation may take precedence over the discomfort of addressing the issue of a marriage contract with your spouse. Your business relationships are between you and your business contacts. The marital relationship is between you and your spouse. These appear to be distinct relationships. However, the dissolution of your marital relationship may severely affect your business relationships.

Below, are listed some practical points to bring up with your spouse when addressing the "marriage contract" issue with respect to your business interests:

1. Protection of the corporation
At law, a corporation is a distinct entity. You may own an interest in it, or direct it, but it has its own legal personality. It is a separate person. It is not married to your spouse.

If your marriage fails, you are probably willing to accept the legal and financial obligations which will be imposed on you. This makes sense because you were one of the parties to the marriage. However, to impose legal and financial consequences on a corporation who was not even a party to the marriage may be extreme.

Should the marriage break down, Ontario's family law leaves open the possibility that your shares in the corporation could be subject to a claim from your spouse. This means that your spouse could claim some ownership in the shares, or force you to sell your shares. Either of these situations will result in a significant impact on the corporation.

If your spouse is successful in claiming ownership in your shares, then there will be a new shareholder as part of the corporation. A new shareholder's agreement will have to be entered. Your spouse will have a vote in determining who will direct the corporation. Your spouse will have a vote in determining who the accountants of the corporation will be. Your spouse will be entitled to receive dividends. Your spouse will have a legal right to court protection from being treated unfairly. Each of these processes brings uncertainty into the governance of the corporation, and additional legal costs.

If your spouse forces you to sell the shares, then the corporation will likely be the purchaser and the entity who will need to fund the sale. The corporation's cash flow will be hampered. Additional funds may be needed from other shareholders to fund the purchase. There will be additional legal costs.

And these are just the financial consequences. Tension will no doubt arise among fellow shareholders should your marital situation compromise the stability of the corporation. There may be significant delays in the operation of the corporation while your spouse's legal counsel determines what claims they will make.

In short, a marital split has the potential to put the corporation in a precarious financial and organizational position. A marriage contract can help eliminate or ease these burdens.

2. Protecting your partners/fellow shareholders
Just as the corporation could be prejudiced by your marital relationship, so can your fellow shareholders or partners. As pointed out, these shareholders or partners can be called on to make additional financial contribution in the event that shares need to be purchased. If your spouse claims an ownership in the business, your fellow shareholders are now conducting their business with someone they had no intention of ever becoming involved with. Your spouse may decide that she may want to take an active role in the corporation, something which may not be in the best interests of the corporation or your fellow shareholders.

In short, your fellow shareholders and partners will be monetarily affected by your marriage split. Further, they may end up doing business with someone who they may not get along with, and may cause tension within the corporation. This is especially likely if you and your spouse have continued involvement in the corporation.

3. Protecting yourself
You are the one involved in the business. You are the one whose entrepreneurial skills started the business. It is your work that will increase the value of the business. You have worked your entire life to accumulate what you have to this point. You will work the remainder of your life to help this business achieve additional success.

A marriage contract protects your investment. You have used, and will use, your business skills to accumulate your investment. A marriage contract prevents your personal life from impacting this business investment.

A marriage contract ensures that, even if your marriage fails, you will still have a business. Nothing could be more debilitating after a failed marriage, then to realize you have no business to conduct either. Starting over in your personal life shouldn't mean that you need to start over in your business life.

4. Protecting your spouse
A marriage contract allows your spouse to keep all that is theirs before the contract, or accumulated during the marriage, in the event of the dissolution of the marriage. A marriage contract will help protect your spouse's investments as well.

5. Protecting the marriage
Ideally, a marriage contract will be put into a drawer and never worried about. A marriage contract does not prevent you and your spouse from enjoying the fruits of the business during the marriage. A marriage contract deals with the hopefully unlikely event of marriage dissolution.

A marriage contract brings into the open what both spouses intentions are with respect to the business. You will be advising your spouse as to the role the business plays in your life, and of the various interests and people you have an obligation to protect. Your spouse will advise you whether or not she agrees that the corporation, the fellow shareholders and yourself deserve protection, or whether your spouse's interests are paramount.

By addressing these issues now, you and your spouse can focus on your marriage. Both of you understand what happens if the marriage fails. Now you can both focus on making the marriage a success.

Summary
You need a marriage contract to protect the interests of others with interests in your business.
As a secondary reason, you need a marriage contract to protect your personal business investment, an investment which is totally separate from the investment you will be making in the marriage. Your spouse can request similar protection for assets or investments which are individual to your spouse.

Your choice of legal counsel is a critical and personal decision. The firm you select should be committed to your business and personal needs.

Since 1922, Pavey, Law, Wannop & Witteveen LLP has been providing its clients - large and small - with quality legal advice and services. Our purpose as a firm is twofold - to assist our business clients in the successful performance of their business, and to provide our individual clients with peace of mind through sound, understandable advice and advocacy.

We are a results-oriented firm. Our business clients receive our superior legal counsel that is practical, and guided as much by the potential impact on their businesses as by the law. Equally, our individual clients are treated with respect and receive clear legal advice geared to resolve issues and find solutions. For all of our clients, Pavey, Law, Wannop & Witteveen LLP is committed to delivering superior representation in a prompt, efficient and cost effective manner.

NOTE: This brochure provides general information and is not intended to be a legal opinion. Readers are cautioned not to rely on this information without obtaining legal advice with respect to their own circumstances.