With litigants of higher socio-economic status and wealth, it is common to find oneself embroiled in several instances of litigation running parallel to the family proceeding. This is especially the case where the married couple both own shares in a family corporation and are also officers and employees. In addition to issues like parenting, child support, spousal support, and equalization, one encounters corporate law issues like oppression, breach of fiduciary duties, fraud, and bankruptcy etc. 

Often these actions become battlegrounds between the parties because limitation periods have extinguished the possibility of a proceeding related to equalization or because shoving a corporate matter into a family proceeding can be clunky, awkward and impractical. Parties can engage in several actions running alongside the family proceeding for strategic reasons, or for simplicity’s sake. Addressing different facets of the same family breakdown in different actions can be effective and function as an exception to the rule against a “multiplicity of proceedings” under section 138 of the Courts of Justice Act RSO 1990, c C.43. That rule requires litigants to avoid instituting multiple actions in court for the same conflict, but the rule requires one to avoid such a multiplicity of proceedings as far as possible. The prohibition is not absolute (Dufferin Construction Company v. The Corporation of the City of Mississauga, 2021 ONSC 1919 (CanLII) at para 21.

In the recent decision of Hrvoic v Hrvoic, 2023 ONCA 508 (CanLii), the Ontario Court of Appeal dealt with a family breakdown that was waged in several different proceedings. In this case, the parties married in 1992 and separated in 2010. During the marriage, in 1998, the Husband, Wife, and a third party founded a company called Marine Magnetics. Initially, the parties had agreed to issue 70 shares to the Husband, 20 to the Wife, and 10 to the third party. All three of the initial founders were made officers and directors. However, after a few years, the Wife took over the third party’s shares, he resigned as officer and director, and the Wife became a 30% shareholder while the Husband remained a 70% shareholder. 

Around 2000, the parties undertook a rollover under section 85 of the Income Tax Act, and the shares were transferred to a holding company (Holdco). In the new Holdco, the Husband acquired 77 shares and the Wife 33. Both became officers and directors. 

When they separated, they addressed some of their matrimonial issues in family court. The business of Marine Magnetics was not divided. Instead, the parties addressed only parenting issues.

Corporate issues relating to the Holdco became complicated when in the summer of 2019 - after the limitation period for equalization expired - the Husband terminated the Wife’s employment without notice and provided her with notices of shareholder meetings in which he proposed to elect himself as sole director and officer of both Holdco and Marine Magnetics, and to remove the Wife as an officer and director of both companies. The Husband also authorized the Wife to receive no further dividends from the Holding company which owned 100% of the common shares in Marine Magnetics (Hrvoic v. Hrvoic, 2021 ONSC 7537 (CanLII) at paras 3-6). 

The Wife refused to attend any of the meetings. Corporate by-laws required 100% of the shareholders to be present for a quorum to hold a vote. The Wife’s non-participation created a deadlock and forced the parties to court.

The Wife commenced an action in which she sought compensation for wrongful dismissal. The Husband replied with his own civil application seeking to compel the sale of the Wife’s common shares in the Holding company (“Holdco”). The Husband’s application was brought under rule 14.05 of the Rules of Civil Procedureand sections 207(1)(b)(iv), 207(2), 185(1)(e), and 184(3) of the Ontario Business Corporation Act, R.S.O. 1990, c. B. 16. The Husband sought an order compelling the Wife to sell her shares of Holdco to him for fair value, an order removing the Wife as a director and officer of Holdco and Marine Magnetics, and an interim and interlocutory order waiving the quorum requirements for shareholders and directors meetings of Marine Magnetics and Holdco to permit such meetings to proceed without the Wife in attendance (2020 ONSC 8139 (CanLII), at para 4).

The Wife then brought another action seeking a declaration that she held 50% of Marine Magnetics. The Wife took the position that she was not a 30% owner of the Holdco - contrary to what was recorded in the Shareholder Ledger of Holdco’s Minute Book. The Wife submitted that a draft agreement had been prepared to give her 50% but it had never been executed. She argued that the Minutes Books of the Holdco were simply not updated. The Wife also brought into evidence that throughout the life of the Holdco, the Husband made sure to give her equal dividends from the Holdco. In fact, he made sure to deposit all funds drawn out of the Holdco into a joint account.

Essentially, by the time of appeal, one matrimonial separation had spawned a multitude (if not a multiplicity) of proceedings: (a) a family law proceeding for parenting; (b) an employment action; (c) an application to compel the sale of shares; and (d) an action for the Wife’s shares. 

To reduce the multiplicities, Justice O’Brien ordered that the Husband’s Application and the Wife’s motion for summary judgment needed to be heard at the same time. At the hearing (2020 ONSC 8139 (CanLII)), the Motion Judge denied the Wife’s motion for summary judgment because of the dearth of evidence. Since the Wife was okay with being bought out by the time of the Motion, the Motion Judge ordered that the matter proceed to trial only on the issues of:

1. the respective shareholdings of Husband and Wife in Holdco (whether it was 50/50 as Wife believed or 70/30 and Husband believed; and 
2. the fair value price Husband would pay Wife to buy her shares of Holdco (para 37).

At trial (2021 ONSC 7537 (CanLII)), the Husband argued that the only thing the Court needed to look at was the Holdco’s Minute Books. It showed him to have 77 shares and the Wife 33. He cited the principle that “the information contained in a company’s minute book is admissible in evidence as proof, in the absence of evidence to the contrary, of all facts stated therein” (para 30), derived from earlier caselaw (Glass v. 618717 Ontario Inc., 2012 ONSC 535, at para. 112, Trezzi v. Trezzi, 2018 ONSC 5180, at para. 37). The Husband acknowledged that the Wife received 50% of dividends but such receipt of funds did not make the Wife an equal shareholder of the common shares. She received 50% dividends apparently because she had special Class D shares, which gave her entitlement to equal dividends.

The problem with the Husband’s argument was that the Shareholder Registry in the Holdco’s Minute Book did not show the Wife as having any Class D shares, and in any event, even if she did, the Articles of the Holdco did not give the Class D shares priority to dividends ahead of the common shares. What this meant for the Husband was that his argument failed. The Wife’s receipt of 50% of dividends could not be attributed to Class D shares. They had to be attributed to something else – like a 50% ownership.

The trial judge found that the Wife must have been a 50% owner of the common shares of the Holdco because:

1. the Husband’s treated the Wife as an equal – even after separation, 
2. the Wife’s received equal dividends despite no entitlement under any purported shares, 
3. the Wife’s had not advanced an equalization claim (para 42). 

In the alternative, the Trial Judge accepted the Wife’s argument that even if she only held 30% of the common shares - she was entitled to another 20% because the principles of unjust enrichment and constructive trust (para 61). 

The Trial Judge denied the Husband’s limitation argument because the Wife could not have known that she was being treated as just a 30% owner until the Husband proposed to have meetings to remove her (para 68-73). With respect to valuation, the Trial Judge again cited Glass v. 618717 Ontario Inc., 2012 ONSC 535, at para 245. for the principles that:

1. Valuation is a fact-based assessment that requires an important element of judgment by the court;
2. In exercising its judgment, the court must be prudent, not optimistic;
3. Neither party bears the burden of providing the fair value of shares;
4. Judges should exercise caution in attempting to mix and match portions from competing experts’ reports;
5. Market value “is the highest price expressed in money obtainable in an open and unrestricted market between knowledgeable, prudent, and willing parties dealing at arm’s length, who are fully informed and under no compulsion to transact”;
6. Fair value is a value that is just and equitable. It is one which provides “adequate compensation (indemnity), consistent with the requirements of justice and equity”; and,
7. While hindsight evidence is generally excluded, there are some limited but potentially significant exceptions.

Applying these principles, the trial judge found that the value of Holdco was $10.8 million, and ordered the Husband to pay the Wife $5.4 million (para 94).

Court of Appeal

At the Court of Appeal (“ONCA”), the Wife initially succeeded in obtaining a lift of the automatic stay to the extent of $1.874 million in exchange for transferring to the Husband 17.35% of her shares in Holdco (Hrvoic v. Hrvoic, 2023 ONCA 27 (CanLII) at para 21). The Husband attempted to review that decision relating to the automatic stay but failed (Hrvoic v. Hrvoic, 2023 ONCA 288 (CanLII)).

At the actual appeal (2023 ONCA 508 (CanLII)), the Husband argued that the trial judge erred in finding that the Wife had equal shares in Holdco and that her reasons were insufficient. The Husband once again repeated that the shareholder ledger clearly showed the shares to be 70% to him and 30% to her. The ONCA rejected the Husband’s argument because the trial judge had clarified that she accepted the Wife’s story that the Husband agreed to give her 50% of the common shares. More importantly “corporate records alone of the original shareholdings are not dispositive” (para 9). This means that the information contained in a company’s minute book is admissible as proof of a state of affairs, however, where there is evidence to the contrary – corporate records will not have final say.

The ONCA stated that the trial judge was entitled to accept other evidence at trial: a) the agreement between the parties that the Wife would receive 50%; b) their equal compensation and dividends and equal treatment even following separation; c) the Wife’s non-claim for equalization within the limitation period (para 9). 

The ONCA rejected the Husband’s argument that the trial judge made a mistake regarding the valuation. 

The ONCA then rejected the Husband’s argument that the trial judge misapplied equitable principles. Specifically, the Husband argued that because the Wife improperly withdraw funds from the Holdco, she should not be qualified for equitable relief like unjust enrichment. The “clean hands doctrine” requires that he who “he who comes to equity must come with clean hands” (Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612, at para. 22). The ONCA rejected this because:

1. the trial judge did not actually grant equitable relief (para 16);
2. the Wife’s misappropriations were “unrelated to the proper division of shares” (para 17);
3. the clean hands doctrine does not automatically disentitle one with unclean hands (para 18).

The ONCA even rejected the Husband’s argument that the Wife had missed her limitation period (para 27). Apparently, a reasonable person would not have commenced a law suit because she was being treated as a 50% shareholder (para 27).

Conclusion

Ultimately, it is difficult to read the history of this case without some cynicism. 

Firstly, it is astonishing how many proceedings the couple in this case instituted. It appears that with limitless resources and with senior counsel, one can litigate the same matter many different ways – all at the same time – contrary to the rule against a multiplicity of proceedings. You can imagine what would have happened to the Wife if she did not have the resources to match the Husband? She may have been buried in a web of proceedings with her claims edged out.

Secondly, we once again see elements of the principle of waiver effectively being applied by Ontario trial courts, without that concept being outright identified. In this case, there was clear evidence that the Husband had about 70% of the shares in Holdco while the Wife had 30%. Yet those clear legal demarcations were made vague as soon as the Husband decided to act contrary to them and was more generous by giving the Wife an extra 20% of the dividends. The fact that the parties did not actually execute an agreement to formalize the Wife as a 50% shareholder of Holdco meant little. 

The lesson to be learned again and again in Family Law is to never be financially generous with your spouse if you have any wealth lest you wish to face tremendous peril should the matter go to Court. Any generosity will give room to your spouse to argue that this is how things were always intended to be. By your own hand, generosity crafts the very knife with which your former spouse disembowels you financially at trial. Repeatedly, this plays itself out in cases. This is not a lesson that amounts to good social or public policy. But it is precisely the lesson that can be drawn when Courts reapportion rights and entitlements contrary to corporate ledgers, contracts and formal agreements based on conduct.