Recognition of Orie Niedzviecki's Contribution at the Ontario Legal Conference

OMH is pleased to acknowledge that our partner, Orie Niedzviecki, was a distinguished speaker at the recent Ontario Legal Conference on Family, Estates, and Business Law, held from February 5-6, 2025. Orie participated as a panelist in the plenary session on "Shareholder Agreements: Dealing with Death, Divorce, and Incapacity." During the session, he presented a paper and discussed the 2008 Court of Appeal decision in Frye v. Frye, which addressed the disposition of shares in violation of a binding shareholder agreement that restricted their transfer. 

SHAREHOLDER AGREEMENTS: ACCOUNTING FOR DEATH, DISABILITY AND MARRIAGE BREAKDOWN Restrictive Covenants Versus a Will : The Frye Estate Decision By: Orie Niedzviecki – O’Connor MacLeod Hanna LLP 

Drafting solicitors have to do a deep dive into the testator’s personal details in order to make sure that the wishes of the testator can come to fruition. It is not enough to get clear instructions from the testator, but it may be necessary to wade a bit out of your comfort zone into such areas as real estate, banking law and corporate law amongst other subjects. You may have to review, for example, the Articles of Incorporation, by-laws and any shareholders’ agreements of any closely held corporation your client wishes to gift shares in to avoid any disappointment in the inability of the will to control the deceased’s assets. Similarly, lawyers dealing with estate administration may find that the clear instructions of the testator as set out in the will are stymied by a shareholders’ agreement that prevents the estate trustee from complying with the testator’s wishes. In some closely held small corporations – especially those where you might have a small number of shareholders (business partners in the vernacular) – there very often, (or should be if they properly consulted corporate counsel when setting up the business), is a shareholders’ agreement that restricts the transfer of shares. Such clauses can vary substantially but the purpose is usually to make sure that, after you have built a business with your long term business partner, you don’t want to suddenly wake up next to a stranger after your business partner passes away, or you don’t want control of a family held corporation to be given to a non-family member. Such clauses can impose restrictions such as no transfer without consent of other shareholders, or that, upon death, shares must be purchased by or otherwise transferred back to either the corporation or the other shareholder. So what happens when there is a binding shareholder agreement that contains a clause restricting share transfer but the shareholder dies with a valid will that leaves her or his property to his/her heir(s)? For example, the will leaves the shares of Corporation X to the shareholder’s sister, but the shareholder agreement prohibits the shares from being transferred to anyone unless the corporation or other shareholders refuse to purchase said shares?

Analysis of Frye v. Frye Estate: Gifting Shares in Contravention of Share Transfer Restrictions The Ontario Court of Appeal dealt with such a situation in the 2008 decision of Frye v. Frye Estate2 . Specifically, the case addresses the enforceability of share transfer restrictions in shareholders’ agreements when a provision in a will purports to gift shares contrary to those restrictions. Factual Background The dispute in Frye Estate arose after the testator, a shareholder in a private corporation, passed away. The testator, Cam, owned shares in George H. Frye Holdings Ltd. (“Corp”). Cam’s will left his shares in the Corp. to his sister ,Cheryl, who was a shareholder of Corp. Cheryl was also one of the estate trustees. However, the Corp.’s unanimous shareholders’ agreement included explicit share transfer restrictions which required any transfer of shares to comply with preestablished procedures, such that any shareholder wishing to sell his or her shares must first offer the shares to the company, and then to the other shareholders on a pro rata basis. Sale to a nonshareholder would only be permitted after these offers have been declined. The trial court found that the bequest in the will was void (and severable) and that the estate was required to sell the shares in accordance with the shareholders’ agreement. Specifically, the trial judge held that the shareholders’ agreement was clear and that “the words referring to the transfer of shares were broad enough to apply to a transfer by testamentary capacity”. Cheryl appealed. The Court’s Analysis Undiscussed by the trial court were provisions found in Section 67 of the Business Corporations Act (the “BCA”) 3 . Section 67(2) of the BCA states that a corporation “whose articles or unanimous shareholder agreement restrict the right to transfer its securities” shall treat “the executor, administrator, estate trustee, heir or legal representative of the heirs, of the deceased security holder” “as a registered security holder entitled to exercise all the rights of the security holder that the person represents”.

Section 67(7) of the BCA states that any person referred to in clause 67(2) is “entitled to become a registered holder” upon depositing a grant of probate or letters of administration with the corporation”. Finally, section 67(9) of the BCA sets out that once said documents are deposited with the corporation, then the corporation can record the transmission of the security from the deceased to the person referred to in 67(2) and to “treat the person who thus becomes a registered holder as the owner of those securities.” So under the BCA and the will, Cheryl was entitled to have Cam’s shares registered in her name by the corporation and to be treated as their owner. But the shareholders’ agreement prevents her from becoming the owner of the shares. This was the dilemma that the Court of Appeal addressed. 1. Primacy of Shareholder Agreements The Ontario Court of Appeal reaffirmed that shareholders’ agreements are binding contracts that govern the rights and obligations of shareholders. Shareholders’ agreements often include transfer restrictions to protect the interests of the corporation and its shareholders, ensuring control remains within a defined group. The Court held that these agreements bind all parties, including an estate, and cannot be unilaterally overridden by a testamentary disposition. 2. Enforceability of Share Transfer Restrictions The Court emphasized that share transfer restrictions are enforceable provided they comply with corporate law principles. Under the BCA, such restrictions are valid if they are reasonable and clearly stated in the agreement. In this case, the restrictions were explicit, requiring shares to be offered to the corporation and then existing shareholders on a pro rata basis first. The Court found no reason to invalidate these provisions. 3. Conflict Between Testamentary Freedom and Contractual Obligations The Court highlighted the fundamental principle that a testator’s freedom to distribute assets through a will is subject to existing legal obligations. In this case, Cam had agreed to the restrictions by signing the shareholders’ agreement. By doing so, the Cam effectively limited his ability to dispose of the shares outside the terms of the agreement. The Court concluded that testamentary freedom does not extend to assets governed by binding contracts.

Implications of the Decision The ruling in Frye v. Frye Estate has significant implications for both estate planning and corporate governance: 1. Importance of Coordinated Estate Planning The case underscores the need for individuals to align their estate plans with their contractual obligations. Testators who hold shares in private corporations must consider the terms of shareholders’ agreements when drafting their wills. Failure to do so can lead to disputes, delays in estate administration, and frustration of the testator’s intentions. Failure to do so on the part of the drafting solicitor could lead to a claim for negligence. This principal could, of course, be extended to any asset of the deceased which is subject to any contractual restrictions on transfer of title. 2. Role of Shareholder Agreements in Protecting Corporate Stability The decision affirms the importance of shareholders’ agreements in maintaining corporate stability. By upholding transfer restrictions, the Court recognized the legitimate interests of corporations and their shareholders in controlling ownership and preserving the corporation’s character. 3. Practical Considerations for Estates and Beneficiaries Executors of estates must be aware of contractual obligations that limit the distribution of assets. Beneficiaries may need to negotiate with existing shareholders or comply with buy-sell provisions before receiving their inheritance. This case serves as a cautionary tale for testators and beneficiaries alike to understand the legal framework governing corporate assets. The court found that the specific bequest to Cheryl was NOT null and void. Legal title was transmitted by the will to the estate trustees who were to hold the shares in trust for Cheryl. But the estate trustees cannot distribute the shares out of the estate to Cheryl without complying with the requirements of the shareholders’ agreement. Unresolved in this case was the issue of whether Cheryl would be entitled to the proceeds of the sale of the shares or whether it could be argued that the proceeds would now be treated as adeemed or go into the residue. The Court of Appeal points to but does not resolve the issue of ademption and specifically whether the anti-ademption provision of section 20(2) of the Succession Law Reform Act4 would apply.

The Frye decision has been applied once in Ontario, in Johnston v. Lanka, a 2010 decision of J. Pattillo, 5 though only in the context of whether a shareholder agreement giving an estate trustee the right to purchase shares from the estate creates a conflict such as to disqualify that shareholder from being an estate trustee. The estate consisted mostly of a 60 per cent interest in a company called Colourific Coatings Inc. The remaining 40 per cent interest in Colourific was owned by the sibling of the deceased, who was also one of the estate trustees only with two other siblings. The applicants were the deceased’s daughter and that daughter’s mother. Under the relevant will, the daughter was to received 60% of the Estate, while her mother would receive 20% and the remaining 20% would be split between the deceased’s four siblings, three of whom were estate trustees. Colourific’s shareholders – the deceased and his sister – had entered into a shareholders’ agreement wherein, upon the death of either of them, the survivor had the option to buy the other’s shares. The sister purported to exercise said option a few months after her brother died. The shareholders’ agreement contained provisions as to how such shares would be valued. The bottom line, however, was that an estate trustee (one of three in this case) would potentially be involved in the decision to sell Colourific’s shares to herself. Self dealing is usually a big red flag for the courts. The applicants asked that the three siblings be removed as estate trustees for various reasons, including a conflict of interest. Specifically, they argued that the fact that the sister was exercising her right under the shareholders’ agreement to purchase the shares created a conflict justifying her removal (in fact removal of all three siblings) as estate trustee. To attempt to allay any worry of conflict, the sister had advised that she was opting out of any decisions regarding the sale of the shares and that she had separate counsel for the sale, apart from counsel for the estate/corporation. The court found that while a conflict was created in this situation, the fact that the sister had recused herself from any decision making with respect to the share sale was sufficient to mitigate the risk. Justice Pattillo cited to the Frye decision for support that the sister’s recusal from decision making about the shares fully mitigated any fear of conflict. The court referred to paragraph 25 of the Frye decision which stands for the principle that where an estate trustee’s fiduciary duties conflict with their personal rights, then either you let any other estate trustees deal with it, or apply for directions. In this case, the other trustees could deal with it.