What Married and Common-law Couples Can Do to Protect their Business from Relationship Breakdown
By: Karina Pogosyan
As a couple’s relationship grows and evolves over time, the parties come to share a lot: from raising and tending to their children and pets, to owning property and running a business together.
This article discusses what legal tools married and common-law spouses can use to protect the business asset they have from a potential relationship breakdown.
In Canada, provincial law sets out how assets are divided when a married couple separates. Under the Family Law Act in Ontario, all assets that a couple acquires during their marriage, with certain exceptions, will form part of their net family property and will be subject to equalization between the married spouses upon separation or divorce (s. 5(1)). In other words, the spouse with a greater net family property will be required to pay one-half the difference between the values of the two net family properties to the other spouse.
Thus, where one or both spouses own a business together, this business just like any other asset they own, would have to be valued and potentially sold, in order to complete equalization between parties upon the dissolution of their marriage or separation.
Where a couple is common-law, each party will leave the relationship with whatever assets were registered or acquired in his or her name during the relationship. Thus, there is no equalization of property, unlike when a married couple divorces or separates.
While there is no automatic right to equalization for common-law spouses, if a party can establish that he or she contributed to the acquisition of a particular asset, the court may find that the value of the asset should be split between the parties and order accordingly. However, due to the costly, lengthy, complicated, and most importantly unpredictable, nature of these kinds of legal proceedings, parties are advised to take measures to avoid them.
Fortunately, married and common-law spouses can take steps to avoid costly and protracted legal battles in the future over their business and other assets through both, domestic contracts and Shareholder Agreements.
Domestic Contracts and Shareholder Agreements
A domestic contract (such as a marriage contract or a cohabitation agreement) can be entered into at any time, before or during a marriage or a common-law relationship (ss. 52(1) and 53(1) of the Family Law Act). This domestic contract allows the parties to agree in advance on the ownership in or division of property, support obligations, and with certain exceptions, any matter that concerns their affairs.
To ensure that the domestic contract will be legally valid and enforceable and that any agreement to amend or rescind the contract will be later upheld in a court of law, the domestic contract must be in writing, signed by both parties and their signatures witnessed (s. 55(1)).
However, even when all the formalities are followed, a court may still find that the domestic contract or a provision within it is unenforceable if there is evidence that a party failed to disclose to the other significant assets or significant debts or other liabilities before signing it. The same can happen if a party can show that they did not understand the nature or consequence of the domestic contract before signing it (s. 56(4)). For this reason, it is highly recommended that each party obtain their own independent legal advice with respect to the domestic contract prior to signing it, as this will help to rebut any subsequent argument that they did not know or understand the document before signing it.
Where a relationship ends and one of the parties to a domestic contract refuses to follow its terms, the other can apply to the Ontario Court of Justice or the Family Court of the Superior Court of Justice to enforce it (s. 35(1)).
If both spouses play a role in the business, they should additionally enter into a Shareholder Agreement. This agreement will lay out the process by which the party would exit the business and transfer their shares and other commitments with as little impact on the business as possible.
Whether married or in a common-law relationship, it is simply good business sense for couples who are business partners to plan for any eventuality and account for all risks that may negatively impact their business enterprise.
By utilizing the legal tools available, through a domestic contract and a Shareholder Agreement, couples who are also business partners can plan for a much more harmonious and stress-free transition for their personal and business lives post break-up, which is a “win-win” for both, them and their business!