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opinion BANKING ON COR P OR AT E BY BRYAN HAYNES No transfer means no transfer! bequest was clearly contrary to the explicit terms of a unanimous shareholder agree- ment and letters patent. The decision (wrongly) emasculates broadly drafted share-transfer restrictions, reducing them to near meaningless effect. Four siblings equally inherited the I shares of a family business on the death of their father. All of the siblings entered into a shareholder agreement. The agree- ment contained a "family consensus" provision as follows: "The fixed purpose and intent of [the father] was and is to preserve the Frye group as a family business and for all his children to share equally therein." The agreement con- tained provisions typically found in shareholder agreements restricting the transfer of shares including a covenant not to "sell, assign, transfer, grant options in respect of, or otherwise deal with" the shares otherwise than in accordance with the terms of the agreement. The letters patent included a provi- sion that "the right to transfer shares in the company shall be restricted in that no share shall be transferred with- out the express sanction of the Board of Directors. . . ." One of the siblings passed away leaving a will directing the executors to transfer his shares to one of his siblings, to the exclusion of the others. Both the Superior Court and the Court of Appeal (rightly) held that the transfer restrictions contained in the shareholder agreement and letters patent were broad enough to catch transfers by testament- ary dispositions. However, the courts departed on the effect this had on the bequest. The Superior Court held that the bequest was void and ordered the estate to sell the shares in accordance with the terms of the shareholder agreement. The Court of Appeal held that the bequest was valid and that the executors held the n Frye v. Frye Estate, the Ontario Court of Appeal held that a bequest of shares was valid, notwithstanding that such shares as bare trustees for the beneficiary until such time as consent to the transfer of legal title was obtained, however long that may take. Meanwhile, the executors must exercise all rights associated with the shares as the beneficiary directs. The Court of Appeal held that the transfer restrictions would only be trig- gered when and if legal title is transferred to the beneficiary. The decision inappro- priately withers down broadly drafted transfer restrictions to merely mean that a transferee's name cannot be entered on the register of shareholders without prior consent. However, share transfer restric- tions are clearly intended to have more meaningful effect than this, particularly in family businesses and other closely held corporations. Otherwise, unauthorized transfers indirectly accomplish the same result as authorized transfers. The Court of Appeal justified its deci- sion in part by stating "contractual obli- gations do not constrain a person's abil- ity to bequeath property by means of a will." This statement is far too sweeping. Although it is true that the validity of a contract to make a will or to refrain from revoking a will is determined by the law of contracts, the making of a will does not therefore necessarily mean that contrac- tual obligations can simply be ignored. If a gift cannot legally be made during a lifetime, there is no reason to permit such transfer at death, whether by will or other- wise. In Pennfield Oil Co. v. Winstrom, it was held that a will could not supersede specific transfer restrictions. Share-transfer restrictions are not sim- ply obligations binding contracting par- ties, but constitute encumbrances on the shares themselves. A transferee of shares does not acquire greater rights than a transferor is able to convey. Restrictions on share transfers constitute part of the constitution of a company, elevating their importance to something greater than mere contractual obligations. In Duha Printers (Western) Ltd. v. Canada, the Supreme Court of Canada held that "the USA is a corporate law hybrid, part con- tractual and part constitutional in nature." The result therefore is that a transfer con- trary to such provisions not only consti- tutes a breach of contract, but the transfer itself is either void ab initio or voidable. Whether a transfer of an equitable interest in shares is valid in the face of share-transfer restrictions has been widely deliberated in the case law, with disparate and incompatible results. The decision in Hunter v. Hunter, affirmed by the House of Lords, supports the com- mon-sense principle that a valid sale of shares can only be concluded by fol- lowing the share-transfer procedures set out in the articles and that the benefi- cial interest could not be sold separately from the legal interest. Although public policy sanctions unauthorized transfers in limited circumstances where transfer restrictions would otherwise unreason- ably interfere with the rights of third par- ties, such third parties naturally acquire subject to the same restrictions. Following Frye, the surviving siblings henceforth disproportionately controlled, and benefited in, the family business, con- trary to the family consensus and share- holder agreement and contrary to the rea- sonable expectation of the parties. None of the siblings could have expected to dispro- portionately benefit from the family busi- ness. The testator, as well as the beneficiary, was well aware of the transfer restrictions. What justification can there be for a rule that protects a person's ability to do some- thing in death which he or she could not have legally done while alive? Bryan Haynes (haynesb@bennettjones. com) is a partner and co-chairman of the commercial transactions practice group at Bennett Jones LLP. This column expresses the opinions of the writer, not his firm, and does not constitute legal advice. www. C ANADIAN Law ye rmag.com J A NU A R Y 2010 13