Law Times

Law Times • OcTOber 5/12, 2009 As HST rumbles grow louder, McGuinty bets on distractions uly 1, 2010, is still nine months away, but the rumbles over the im- pending harmonization of the GST and the PST are growing ever louder. While businesses are eagerly anticipating the change since they stand to save the most money and Premier Dalton McGuinty's government looks forward to a windfall in tax revenues, con- sumers are getting unhappier by the minute. Add in mutual fund dealers, small businesses, and even the First Nations, and the lineup to take a kick at the HST is turning into a free-for-all. J The only question is which is the bigger millstone around McGuinty's neck: the HST or the continuing revelations of misspent public money at eHealth Ontario and the On- tario Lottery and Gaming Corp.? Those problems make the launch of a $50-billion lawsuit last week against tobacco com- panies seeking damages for past and ongoing health-care costs all the more interesting for its timing. The Tobacco Damages and Health Care Costs Recovery Act, passed unanimously earlier this year, creates a framework to sue big tobacco companies and to calculate just how much cigarettes have cost in health- care expenditures. It also allocates liability by market share since 1955 among the big three companies: Impe- rial Tobacco Canada; Roth- mans, Benson & Hedges; and JTI-Macdonald Corp. The suit notes tobacco-re- lated health care costs Ontario more than $1.6 billion a year and names smoking as the No. 1 cause of premature death and illness, killing 13,000 a year. The tobacco headlines are a welcome distraction from the daily beating the government benches have faced since the legislature returned to session. It does, however, smack of changing the rules in the mid- dle of the game to suit your purposes. On the other hand, it doesn't provide fodder for the opposition because the house unanimously approved the bill in the first place. The last time former premier Mike Harris' government tried the tactic was back in 2000. He went after $40 billion, but the suit died because New York was the wrong jurisdiction. Given the time it will take to process this suit — and the billable hours some lucky mem- bers of the profession will rack up on both sides of the issue — it remains little more than a grand public gesture since the outcome is years away. But even a $50-billion law- suit against the bogeyman of big tobacco can't distract from an- other massive HST public-rela- tions headache on the horizon. Inside Queen's Park By Ian Harvey Status Indians are also angered over the harmonization plans because it looks as if they will lose a cosy arrangement that al- lowed them to avoid PST when shopping off reserve. Ontario aboriginals have a unique deal that allows them to flash their status card in or- der to make purchases exempt from PST. Federal rules for GST, however, require shipping the goods to an address on a re- serve. This tax break is about to end as the rules governing GST and PST are aligned. The warning shots were fired last spring when the HST pro- posal was unveiled at Queen's Park. Last April, Stan Beardy, grand chief of the Nishnawbe Aski Nation representing 49 First Nation communities in the north, said "the HST may breach the First Nation right to tax exemption and stands to place an unprecedented and unfair burden of debt on First Nation people. "Assuming there are approx- imately 180,000 status Indians in Ontario, and assuming the average annual taxable pur- chase for each of them is some- where in the range of $10,000, the proposed eight-per-cent HST translates into an approx- imately $150-million windfall for the government each year," he observed. "And while only a rough calculation, this gives some perspective as to the size of the taxation burden the HST pres- ents to the very people who can least afford it." He cited treaties 8 and 9 in claiming tax exemption is a right and added that any be- trayal of those contracts raises serious potential consequences. "What's more alarming is that this could lead to wide- spread civil unrest and litiga- tion, the same dangerous sce- nario the Ipperwash Inquiry report warned against." Since then, more chiefs have added their voices to the pro- test, including the more mili- tant Mohawks. The dispute over the HST, then, has a real potential to escalate despite distractions like the tobacco lawsuit. We've already seen how long it takes to resolve impasses when First Nations take things into their own hands. Look at Caledonia, where it's been three years with no progress. LT Ian Harvey has been a journal- ist for 32 years writing about a diverse range of issues including legal and political affairs. His e-mail address is ianharvey@ rogers.com. COMMENT Frye ruling decision in Frye v. Frye Estate. The ruling makes it clear that clauses ei- ther in constating documents, such as articles of incorporation and letters patent, or share- holder agreements do not prevent sharehold- ers from bequeathing their holdings in a man- ner inconsistent with those documents. In the Frye case, the corporation at issue had letters patent providing that there could be no transfer of shares unless it got approval from the board of directors, a restriction common to private corporations. After the death of the founder, his chil- a recipe for litigation A BY CLARE BURNS, LORI DUFFY & MARALYNNE MONTEITH For Law Times nyone advising shareholders of pri- vate corporations needs to pay heed to the Ontario Court of Appeal Speaker's Corner dren, who remained shareholders, entered into a unanimous agreement in 1994 that re- quired approval by three of the four siblings for any transfer of shares. The agreement also required that anyone wishing to sell shares had to offer them first to the company and then, on a pro rata basis, to the other share- holders. One of the siblings, Cameron Frye, died and left a will in which he bequeathed all of his shares in the corporation to his sister Cheryl Sylvestre. A third sibling objected that this was contrary to the terms of the shareholders' agreement and the terms of the letters patent. He sued. At trial, the court held that the gift was null and void as it was contrary to the share- holders' agreement. The judge ordered the shares sold and that the proceeds form part of the residue of Frye's estate (which, ac- cording to his will, would be divided equally among the siblings). But on appeal, the court concluded that contractual obligations do not constrain a person's ability to bequeath property through a will. The ruling referred to the provisions of s. 67(2) of the Ontario Business Corporations Act. Noting that this provision hadn't gone before the trial judge, the court held that it made clear that on Frye's death, the shares passed to his estate trustees, who were en- titled to be treated as registered holders of the shares regardless of any transfer restric- tions in the constating documents or in any shareholders' agreement. Once the shares devolved to Frye's estate, the appeal court agreed with the trial judge that the estate was bound by the terms of the constating documents and the shareholders' agreement, although it noted there could yet be an overriding provision in the governing corporate statute. As a result, the fact that the gift was in breach of the contract didn't cause it to fail. Rather, the estate trustees held those shares as bare trustees for Sylves- tre but faced constraints in how to transfer them to her. The judge concluded the estate trustees had discretion as to when to seek the con- sents necessary to effect the transfer to Syl- vestre and were at liberty to wait for a change in circumstances or to try to bring about a change in the consent procedure. In the in- terim, the estate trustees had an obligation to exercise the rights associated with the shares as Sylvestre directed. Consistent with the law governing estate representatives, their obliga- tions were duties held for life unless released by a court after passing accounts. www.lawtimesnews.com The decision brings some serious issues to light. In particular, people drafting share- holders' agreements will need to be cogni- zant that restraints on alienation clauses are, on their own, unable to prevent a testator from bequeathing their shares to someone in breach of them. At first blush, it appears that estate trustees must consider the pos- sibility of lengthy wrangling to accomplish a transfer to a beneficiary where it results in such a breach. Moreover, the intended re- cipients of the shares can effectively operate as shareholders by sim- ply requiring the estate trustees to do their bidding and thereby never engaging the restraint on alienation clause. In February, the Supreme Court of Can- ada dismissed an application for leave to ap- peal the Frye decision. Nevertheless, it seems likely there will be efforts to "draft around" it. For example, the shareholders' agreement could provide that any transfer inconsistent with its provisions is void ab initio. The shareholders could also include companion provisions in their wills to provide an imme- diate remedy to the others. Another approach is to provide that the shareholders own the shares jointly so that they pass directly to the surviving joint ten- ants. However, such a move would require addressing issues surrounding joint tenancy such as the tax implications and whether the right of survivorship would withstand the scrutiny of a court. But if revisions to shareholders' agree- ments and wills or joint tenancy rights don't solve the problem, will estate trustees in these circumstances find themselves languishing indefinitely? A closer read of s. 67(2) may hold a star- tling solution. The provision makes it man- datory for a corporation with restrictions on alienation of its shares to treat designated people as registered security holders with all the rights that entails. Among the people listed are personal representatives and ex- ecutors, as the Court of Appeal pointed out in Frye. S. 67(7) and 67(8), in turn, confer on any person listed the right to become a reg- istered holder or to designate someone else as the registered holder of the deceased's securities. S. 67(9) then empowers the cor- poration to register the transmittal of the deceased's securities to the designated per- son and to thereafter treat the holder as the owner of them. S. 67(4) specifically relieves the corporation from inquiring into or see- ing to the performance of any duty owed to a third party by the registered holder or by any person treated as such. But here's the kicker: provisions in s. 67(2) aren't restricted to personal representatives of a deceased person; they also include any heir in the list. Therefore, pursuant to the terms of s. 67, once presented with the specified documen- tation, a company incorporated under the Ontario Business Corporations Act, when requested to do so, must transfer shares left by will to a particular heir regardless of any restrictions on alienation in its constating documents or any shareholders' agreement. Note as well that the Canada Business Corporations Act has a similar series of rules. So let the lawsuits begin. LT Clare Burns and Lori Duffy are partners, while Maralynne Monteith is a senior tax lawyer at WeirFoulds LLP. PAGE 7

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