What Happens to Business Assets After a Divorce?

You or your ex-spouse may own a business, which raises the question of what happens to the business’s assets when getting divorced. In this article, we will discuss the concept of “piercing the corporate veil” and how this may have impacted the division of business assets due to a divorce. We will provide key takeaways and considerations for business owners going through a divorce, including circumstances where a court may divide business assets, despite being owned by the corporation and not the individual personally. 

In particular, we will look at Aubin v. Petrone, 2020 ABCA 13, as an example of when the court will “pierce the corporate veil” and order that the assets owned by a business will be divided amongst ex-spouses in a family law matter. 

What is “piercing the corporate veil”?

First, we need to define a corporation. A corporation is a separate body from its owners. This means that the assets of a corporation are not assets of the shareholders. 

Since a corporation is separate from its owner, the concept of the “corporate veil” comes into play. The “corporate veil” exists between a corporation and its owners, directors, and other stakeholders. Therefore, the corporation is not responsible for the stakeholders’ liabilities, and the stakeholders are not responsible for the corporation’s liabilities. 

There are, however, situations where the corporate veil will be “pierced” or “lifted,” meaning that the corporation will be responsible for a stakeholder’s liabilities or vice versa. For a family law matter, if a spouse owns a business and the corporate veil is “pierced.” The assets owned by the corporation may be divided into family matters, even though the family matter only involves two individuals and not the corporation as a separate body. 

As we will discuss, the Aubin case outlines when a corporate veil may be “pierced” in a family law matter. This is significant, as from the perspective of a business owner, your corporation’s assets may be at stake upon divorce, even though this is not the default position. From the perspective of an ex-spouse of the business owner, you may be entitled to the business’s assets upon divorce. 

The rule for “piercing the corporate veil” is outlined in the Supreme Court of Canada case, Kosmopoulos v. Constitution Insurance Co, [1987] 1 SCR 2 (at para 10):

As a general rule, a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.) The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue”: L.C.B. Gower, Modern Company Law (4th ed. 1979), at p. 112.

In other words, if the business is essentially controlled entirely by a shareholder or parent corporation, then the court may consider piercing the corporate veil if not doing so would be “too flagrantly opposed to justice”. For example, the court may “pierce the corporate veil” and divide the assets of a business owned by a spouse if not doing so would be unjust. 

Are you entitled to business assets after a divorce?

The Aubin case, a recent Alberta Court of Appeal decision, describes circumstances where a spouse’s business assets, although held by the corporation, were to be divided in a matrimonial dispute. 

Courts have adopted the 2-step test from Transamerica Life Insurance Co of Canada v. Canada Life Assurance Co (1996), 28 OR (3d) 423 (Gen Div), aff’d [1997] OJ No 3754 (CA) [Transamerica]:

The corporate veil will be lifted where:

1. There is complete control of the subsidiary, such that the subsidiary is the “mere puppet” of the parent corporation or primary shareholder; and 
2. The subsidiary was incorporated for a fraudulent or improper purpose, or used by the parent as a shell for improper activity. 

The Court of Appeal in Aubin recognized situations where a business was built on direct or indirect contributions from both spouses, despite being legally controlled by one party, which can lead to unfairness if a marriage breaks down. Aubin involved a company owned by the husband. The wife worked at the company for 16 years and was a minority shareholder and director of the company. A few years after the separation, the wife was terminated and removed as director. 

In Aubin, the husband controlled the company, including controlling his own salary and bonuses. The trial judge determined that he was able to make decisions about the company to benefit him and his family. One example involved using the company to finance the purchase of a property for the benefit of his family. The husband was also able to draw income directly from the company.  

The Court of Appeal also reminds us that the corporate veil is lifted to prevent a legal entitlement from being unenforceable. In family matters, this could mean that the veil is lifted to enforce support payments or property division. The Court of Appeal accepted that the trial judge found that as a whole, the husband’s actions, such as terminating and removing the wife as a director, would lead to a loss, which would be unjust. 

Ultimately, the court decided that the wife was entitled to half of the property, including part of the company. The court pierced the corporate veil, and the company’s building was used as security for the husband’s equalization payment to the wife for her half of the matrimonial property.  

What About the other shareholders?

Even though there were other shareholders of the company, this did not prevent the court from finding that the corporate veil should be lifted. Otherwise, this would allow the company owner to issue one share to a third-party shareholder to defeat the claim. 

Suppose there are other shareholders of the company. In that case, the court may consider other factors such as the nature of the company (is it a family business or a publicly traded corporation?), the shareholders’ reasonable expectations about how the company will be run by its principals, and whether the shareholders had genuinely purchased their shares for value. 

A judge may develop creative solutions in cases where there are minority shareholders. In Aubin, the judge did not transfer assets from the husband’s company nor secure the matrimonial debt against all of the company’s assets. Instead, the company’s building was used as security for the husband’s debt. 

Mincher Koeman Provides Assistance to Business Owners Through Divorce

Even though corporations are separate from their owners, corporate assets may be subject to matrimonial property division if the corporation is primarily controlled by one of the spouses. 

Do you or your ex-spouse own a business? If so, you should book a consultation with Mincher Koeman so that one of our experienced family law lawyers can assess your claim. Our family law lawyers are dedicated to finding the best resolution for clients, with specialized knowledge in helping business owners who are going through a divorce. 

To book a consultation, please contact us online, or by phone at 403-910-3000.