On April 30, 2008, the Court of Appeal for Ontario released its decision in Frye v. Frye Estate. The decision addresses the issue of whether a bequest of shares in a Will is valid where there is a prohibition on the transfer of such shares under a unanimous shareholder agreement and in the company’s articles of incorporation. While the ruling generated considerable discussion for those who practice in the Trusts & Estates area of law, somewhat more overlooked was its impact on corporate law as the decision contains important considerations when negotiating and drafting shareholder agreements.
The Frye siblings feuded constantly over the years. When their father died, he left the five children equal interests in his holding company. The letters patent under which the company was incorporated in 1968 contained a provision restricting the transfer of shares without a resolution passed by the board of directors of the company.
In 1994 one of the five siblings sold his shares back to the company, such that the four remaining siblings then each owned 25 per cent of the company. The four remaining shareholders entered into a shareholder agreement which, among other things, restricted the transfer of shares without the approval of at least three of the four shareholders.
One of the four shareholders subsequently died. In his Will, he left his 25 per cent interest in the company to another sibling which, if effected, would bring her total holding in the company to 50 per cent. The transfer was challenged by one of the remaining shareholder siblings on the basis that the purported transfer contravened both the shareholder agreement and the company’s letters patent.
The trial judge ruled that the gift was null and void as it was contrary to the shareholder agreement, that the shares should be sold, and that the proceeds would fall into the estate’s residue and be divided equally among the four siblings.
On appeal, the Ontario Court of Appeal (OCA) overturned the trial judge’s decision. The OCA held that contractual obligations do not constrain a person’s ability to dispose of property by means of a Will. The OCA found that while the shareholder agreement and letters patent apply to a share transfer by testamentary disposition, it does not follow that the bequest of shares must be set aside.
Miller Thomson Analysis
The OCA cited subsection 67(2) of the Business Corporations Act (Ontario), a provision not drawn to the attention of the trial judge, which expressly contemplates corporate articles and shareholder agreements that restrict the transfer of shares. It provides that a corporation shall treat “the executor, administrator, estate trustee, heir or legal representative of the heirs, of the state of a deceased security holder” “as a registered security holder entitled to exercise all the rights of the security holder that the person represents.”
The OCA found that it is the duty of the estate trustees to attempt to carry out the deceased shareholder's directions to distribute the shares out of the estate in specie. They must attempt to accomplish the transfer of shares in whatever manner they deem appropriate. The estate trustees have discretion as to when and how to seek the necessary consents and, if the consents are not forthcoming, they have discretion to await a change of circumstances, or attempt to effect such a change.
The estate trustees’ present inability to obtain consent to transfer the shares pursuant to the Will of the deceased shareholder does not provide a basis for voiding the bequest. During the interim, the estate trustees, as bare trustees, must exercise the rights associated with the shares as directed by the beneficial shareholder. This creates a peculiar result: the share ledger of the company would not reflect the transfer without the required consents, so it would continue to reflect the name of the deceased shareholder whose shares are held by the estate trustees that are, in turn, obliged to exercise the rights associated with the shares as directed by the intended transferee until the remaining shareholders are able to reach a resolution.
The decision gives rise to practical issues to be considered by shareholders and their advisors. It suggests that restrictions on transfer set out in shareholder agreements and corporations’ articles are ineffective in preventing a testator to leave shares to another in breach of such clauses. Further, the case suggests that an intended recipient of shares under a Will can effectively operate as a shareholder by simply requiring the estate trustees of the deceased shareholder’s estate to execute decisions on their behalf.
The application for leave to the Supreme Court of Canada was denied in Frye on February 5, 2009 and, as such, the ruling is now considered definitive law in Ontario which courts in other Canadian jurisdictions may find compelling.