Estate freezes and resulting litigation issues

Law360 Canada (November 11, 2024, 10:11 AM EST) --

Jason Moore

In my recent article “Estate freezes: An icebreaker,” I discussed how an estate freeze can be used to “lock in” the value of a family business’ shares at a given point in time and pass on the growth of that business to the business owner’s children. I briefly touched on some of the potential pitfalls that can complicate the execution and maintenance of an estate freeze. One of these complications — and the source of much of the litigation surrounding estate freezes — is the availability of the oppression remedy to the company’s shareholders.  

The oppression remedy in a nutshell

Both s. 241 of the federal Canada Business Corporations Act, R.S.C 1985, c. C-44 (CBCA) and s. 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (OBCA) provide shareholders with legal recourse if the corporation or its affiliates act in a way “… that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation …” (OBCA, s. 248(2)).

Recall that, when executing an estate freeze, a business owner makes their children shareholders of the corporation who stand to inherit the corporation’s wealth while simultaneously barring them from exercising any control over the corporation. This can lead to tension between the children shareholders and the parent business operator. These disputes can arise long after the estate freeze was executed and as a direct result of the corporate structuring decisions that were made to implement the freeze.

Estate freeze litigation: How the cookie crumbles

An example of just such a dispute arose in Wilfred et al. v. Dare et al., 2017 ONSC 1633. In 1980, Carl Dare — manager of the Dare Foods company, the maker of cookies such as Bear Paws and Wagon Wheels — executed an estate freeze of Dare Foods’s three operating companies. He transferred the ownership of these three companies to a newly created holding company, Serad Holdings Limited (Serad Ltd.). He then transferred the common shares of Serad Ltd. to the Dare Family Trust, of which Carl’s three children, Byran, Graham and Carolyn, were beneficiaries. Carl held the voting preference shares in Serad Ltd.

Carl’s children signed shareholder agreements in Serad Ltd. As part of the shareholder agreements, the children were required to provide their siblings with an opportunity to buy their shares at fair market value if they decided to sell their shares (a “right of first refusal”). In 2001, the Serad Ltd. shares in the Dare Family Trust were distributed to the children. By then, Serad Ltd. had a value of approximately $120 million.

In 2014, Carl died, and Carloyn notified her siblings that she wanted to sell them her shares for $55 million. Her siblings refused to purchase the shares. Carolyn then tried to sell the shares to other buyers. One buyer expressed interest but only wanted to purchase her shares if it could purchase all of the shares in Serad Ltd. However, Bryan and Graham refused to sell their shares. Carolyn brought an application against Bryan and Graham, accusing them of oppressive conduct for refusing to buy her shares.

The court found that Bryan and Graham’s conduct had not been oppressive. Carolyn had independent legal advice when she signed the shareholder agreement. She knew that Carl had not included any requirement that his children buy each other’s shares, such as a “shotgun clause,” and Carolyn could not have had a reasonable expectation that her siblings would be required to purchase her shares for her stated price. The court further found that a minority interest in a closely held family business would have “inherent limited liquidity.”

The Dare decision raises several questions concerning estate freeze litigation. If Carloyn had not had independent legal advice, would that have supported a claim for oppressive conduct? How does the court consider other common terms in shareholder agreements when assessing claims for oppression in estate freeze litigation?

Litigating an estate freeze requires in-depth knowledge of multiple areas of law, including contract law, corporate law, trust law and oftentimes, tax law. For those who deal with these issues or who are interested in them, there is a lunch and learn seminar on this topic that will feature Clare Burns, Jonah Waxman and Adam Prewer on Nov. 12, 2024, starting at 12 p.m. This seminar is an opportunity for new and experienced estate and family lawyers to learn about this rapidly evolving area of trusts and family law. For more information and to register, please access this link.

Jason Moore is a lawyer at Wagner Sidlofsky LLP, practicing in the estate and commercial litigation groups.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, LexisNexis Canada, Law360 Canada or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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