Dividing Corporate Assets in Divorce

In Alberta, all assets owned by spouses or adult interdependent partners are divisible family property, including shares in private corporations.

When spouses or adult interdependent partners separate, Alberta family property legislation provides that the value of all property owned by each or both parties is divisible between them.

The term “property” has been interpreted broadly by Alberta courts to capture virtually all types of interests that a person may hold, either directly or indirectly, such as real property (i.e., real estate), tangible personal property, and intangible personal property (e.g., intellectual property). This wide definition necessarily includes any ownership interest in a business.

Examples of common business interests include ownership in private corporations (including professional corporations) or partnerships, including various forms of securities such as shares, options, warrants, SAFE (simple agreement for future equity) investments, and debt securities (such as bonds or preferred shares).

As a result, if a spouse or adult interdependent partner owns securities in a private corporation, directly or indirectly, or is owed any money from a private corporation (i.e., shareholder or other loans), the value of those assets may be divisible with their spouse or partner upon separation or divorce.

Do I have to give my shares to my spouse or partner?

In Alberta, courts are permitted three methods to effect a distribution of property between spouses or adult interdependent partners:

1. order one party to pay money or transfer an interest in property to the other party;

2. order that certain property be sold and the proceeds of the sale be distributed between the parties as ordered; or

3. declare by order that one of the parties has an interest in certain property owned by the other.

Where business interests are at issue, the most common court order provides for an amount of money to be paid from one party to the other party, representing the receiving party’s interest in the business (i.e., an equalization payment).

If there are insufficient assets to satisfy an order for a cash payment, a court may decide that the property should be sold, and the proceeds divided in a manner that is just and equitable between the parties.

The situation becomes more complex where there are insufficient assets for a cash payment and where the property at issue is an interest in a private company.

This is, in part, owing to the fact that private company shares and securities are illiquid assets, since their sale is often subject to complex corporate and securities legislation.

In this context, courts may instead order that the non-owning party has an interest in the owning party’s business interest and may encumber that business interest in an amount equal to the non-owning party’s economic entitlement to the business. This usually means that the owning party cannot dispose of or deal with the business interest in a way that a court order does not provide for.

There are a multitude of other options open to a court in giving effect to such an order, such as imposing a trust for the benefit of the non-owning party.

What if a family trust holds shares?

The treatment of property owned by trusts is highly fact-driven in Alberta. Factors such as whether the trust is discretionary or non-discretionary, the identity of the beneficiaries and trustees, and the specific terms of the trust deed or indenture must be closely examined when determining whether an interest in a trust may be divisible family property.

However, in many circumstances, courts will often ‘look through’ the trust structure to determine whether a spouse’s or adult interdependent partner’s interest in a family trust is divisible family property and, if so, the value of that trust interest. Great care must be taken before deciding to transfer assets to a trust for protection in the event of a divorce or separation, and expert guidance is suggested.

Will my spouse or partner control my business?

While a court does not normally order the transfer of shares between parties, a declaration by a court that a party has an interest in a business of the other party may result in the non-owning party having certain rights that they would not otherwise have.

For example, if a court were to declare that a non-owning party is a beneficial owner of a corporation’s shares, that declaration may entitle that party to certain rights under corporate law, such as requesting a shareholder meeting or submitting a shareholder proposal.

In addition, a court may also order the owning party to share certain documentation with the non-owning party, effectively giving the non-owning party informational rights regarding the business.

Further, the non-owning party may be entitled to commence an action for shareholder oppression or derivative action in the name of the corporation, which could lead to a vast array of remedies, including the replacement of directors, the issuance of shares to the non-owner, or even an order restraining certain conduct of the corporation or its directors.

How can I protect my business assets?

If you are not in the process of separation or divorce, it is essential to protect your business interests by entering into a prenuptial agreement, postnuptial agreement, or cohabitation agreement, which carefully sets out how your business interests will be dealt with in the event of a separation or divorce.

If you are in the process of separation or divorce, expert guidance is recommended to safeguard your business interests.