By: Hannah Pasloski and Janelle Anderson

See the published version of this article in SHCA’s Think BIG magazine (pages page 29 to 33).

This is the second in a three-part series by Procido LLP on succession planning for business owners. The first article established why succession planning must begin early and treat the business as a core estate asset. This article turns to the relational and structural dimension: how family dynamics intersect with business ownership, and what legal and corporate tools exist to navigate that intersection effectively.

Business succession disputes often do not arise from bad intentions. Rather, they tend to emerge from unspoken assumptions: assumptions about who will take over the business, what each family member may be owed, and what “fair” actually means in practice. These assumptions tend to incite conflict among the family after a business owner has passed away and is no longer available to clarify their intentions. Clarity concerns consequently produce a combination of fractured relationships, disrupted business operations, and costly legal proceedings that serve to diminish the value of a business that the owner may have spent a lifetime building.

This article addresses the relational and structural challenges at the heart of the most common succession failures: understanding the distinction between fairness and equality, testing that distinction in a practical example between active and non-active family members in the business, navigating blended families and spousal interests, and translating those considerations into enforceable legal and corporate structures.

Equality Versus Fairness: A Necessary Distinction

An impulse to treat children equally in the estate planning process is generally reasonable and often expected. In the business succession context, however, equal distribution is likely to create unintended consequences. Equal distribution of shares may be administratively simple, but it is also one of the most reliable ways to create a governance problem. Multiple co-owners with equal stakes and differing priorities will contribute to decision-making paralysis, which exacerbates operational disruption and, in closely-held corporations without a tie-breaking mechanism, can require court intervention to resolve.

Fairness, on the other hand, stems from the business owner’s subjective circumstances on the legacy they wish to leave behind. A fair succession plan asks different questions that align with the business’s specific needs: Who is positioned to lead this business? What has each person contributed? What outcomes best support the long-term continuity and success of the business and the relationships within the family?

A business owner may determine that the fairest outcome involves transferring the business to one child absolutely while distributing various estate assets outside of the business to provide a more “equal” outcome. Alternatively, a business owner may decide to sell their interest to an existing business partner or key employee and utilize the sale proceeds to provide an equal distribution to the surviving family members. In some cases, no family member may be well-positioned to take on ownership, and the succession plan should reflect that reality rather than impose ownership where it is not warranted or in the best interests of the business.

In securing a strong business succession plan, clear and deliberate communication with family members maintains value by establishing expectations, with formal documentation acting to solidify those intentions.

Equality and Fairness in Practice: Active Versus Non-Active Family Members

A common business succession conflict scenario involves children who have had materially different levels of involvement in the business, but nonetheless obtain equal shares. As an example, consider the owner had two children: one of whom has worked in the family business for many years contributing their labour, accepting below-market compensation, and building client and supplier relationships, while the other pursued an independent career.

If both children were to receive an equal share of the business regardless of their respective contributions, the active child is likely to resent maintaining co-ownership with a sibling who did not bear the same financial risk or contribution to business operations. The non-active child, now a co-owner of a business they do not operate, either holds a passive interest or faces pressure to participate in a business they never intended to join. Neither outcome is conducive to the business’s success or beneficial to the familial relationship.

As noted in the above example, defaulting to an equal division would not be a viable solution. Instead, an owner should consider and come to a deliberate decision, and formalize that decision early. In this scenario, the business owner has several alternative options, including:

• Transitioning business ownership to the active child, with the non-active child’s share of the estate being equalized through other assets, such as life insurance proceeds, registered accounts, or non-business property;

• Structuring a buy-out mechanism that requires the business or the active child to purchase the non-active child’s inherited interest at a defined value and on a defined timeline; or
• Using distinct share classes to separate voting control from economic participation, allowing the active child to hold operational authority while the non-active child retains a passive economic interest without any governance rights.

Each of these approaches requires both properly structured corporate documentation and a consistent estate plan. Without alignment between corporate and estate planning documentation, well-intentioned planning will be primed to fail at the implementation stage.

Blended Families, Second Marriages, and Spousal Interests

Evolving family structures introduce an additional layer of complexity that is frequently underestimated in business succession planning. Where a business owner has remarried, or where the family includes step-children or children from prior relationships, planning assumptions that seem obvious to the owner may not align with the law’s application in the absence of explicit instruction.

Saskatchewan’s Intestate Succession Act, 2019 considers a child, or “descendant,” to be natural-born or legally adopted children, generally excluding step-children unless otherwise specified. A business owner who intends to include step-children as beneficiaries of a business interest must make that intention explicit in their Will and must ensure that the Will is consistent with any corporate documentation governing share transfers.

Spousal interests are frequently overlooked entirely. Under Saskatchewan’s Family Property Act, a spouse may have a family property claim against business interests accumulated during the marriage, regardless of how shares are held. A second spouse’s potential entitlement can directly conflict with an intention to transition the business to children from a prior relationship. Marriage contracts such as an interspousal or separation agreement can address this proactively, but only before the conflict arises. As such, the opportunity to protect the owner’s business interests may have already closed by the time succession planning begins. A business owner whose Will and corporate documents were structured during a prior marriage should review whether those documents remain reflective of their current family structure, as changes in marital status carry legal consequences that extend beyond the Will itself.

Communication is Imperative (But Not a Substitute for Documentation)

As previously noted, direct communication with family members about succession intentions serves to reduce the risk of disputes. Open and candid discussion allows family members to raise concerns, understand the rationale behind decisions, and set their expectations before a conflict occurs. A family member who understands during the owner’s lifetime why a particular structure was chosen is far less likely to challenge that structure after the fact than one who encounters it as a surprise in the estate administration process.

That said, communication is not a substitute for formal documentation. Verbal reassurances and expressed intentions (however sincerely held) rarely survive a dispute. As discussed in the first article of this series, the Saskatchewan Court of Appeal’s decision in O’Brien v. O’Brien Estate, 1998 CanLII 12397 (SKCA) is a clear illustration of what happens when informal arrangements are relied upon in place of properly documented agreements. After the owner’s death, such informal arrangements could not be enforced. Communication over succession planning should occur early and often, and documentation must always follow to permit the succession plan to come to fruition.

Legal and Corporate Tools

Translating family and fairness decisions into enforceable outcomes requires specific legal and corporate tools. The following are some of the primary mechanisms available to Saskatchewan business owners in structuring a succession plan.

1. Shareholder Agreements

A shareholder agreement is the foundational document governing the relationship between co-owners of a corporation. In the succession context, it defines what happens to a deceased shareholder’s interest: who has the right (or the obligation) to acquire it, at what price, and within what timeline. Under Saskatchewan’s Business Corporations Act, a unanimous shareholder agreement can restrict or transfer powers ordinarily exercised by the board of directors, providing significant flexibility for closely-held corporations in structuring governance and transition rules.

A shareholder agreement that does not address the death or incapacity of a shareholder is an incomplete succession plan. Without it, the estate of a deceased business owner may inherit shares subject to restrictions and governance obligations that neither the estate nor the beneficiaries are equipped to manage, while the surviving co-shareholders are left in a governance structure that was not designed for the situation they now face.

2. Buy-Sell Provisions and Valuation

Buy-sell provisions within a shareholder agreement establish the mechanism by which a departing or deceased shareholder’s interest is transferred. Common structures include:

• Rights of first refusal, which give surviving shareholders the right to purchase the deceased’s shares before the estate can transfer them to an outside party;
• Mandatory buy-outs triggered by the death of a shareholder, which require the surviving shareholders or the corporation itself to acquire the deceased’s interest within a defined period; and
• Shotgun provisions, which are typically used where a shareholder dispute requires resolution and one party must either buy or sell at a stated price.

These provisions are only as effective as the valuation mechanism attached to them. A poorly defined formula (or no formula at all) will not withstand a dispute over the price of the deceased’s interest. Life insurance is frequently used to fund buy-out obligations at death, ensuring that a surviving shareholder can acquire the deceased’s interest without drawing on business cash flow or incurring debt that disrupts operations.

Buy-sell provisions within a shareholder agreement establish the mechanism by which a departing or deceased shareholder’s interest is transferred. Common structures include:

• Rights of first refusal, which give surviving shareholders the right to purchase the deceased’s shares before the estate can transfer them to an outside party;
• Mandatory buy-outs triggered by the death of a shareholder, which require the surviving shareholders or the corporation itself to acquire the deceased’s interest within a defined period; and
• Shotgun provisions, which are typically used where a shareholder dispute requires resolution and one party must either buy or sell at a stated price.

These provisions are only as effective as the valuation mechanism attached to them. A poorly defined formula (or no formula at all) will not withstand a dispute over the price of the deceased’s interest. Life insurance is frequently used to fund buy-out obligations at death, ensuring that a surviving shareholder can acquire the deceased’s interest without drawing on business cash flow or incurring debt that disrupts operations.

3. Trusts and Holding Structures

Family trusts and holding companies are planning tools that can serve multiple succession objectives simultaneously. A discretionary family trust holding shares in the operating company can allow income to be allocated among beneficiaries (including family members in lower tax brackets), defer the concentration of ownership until the appropriate time, and provide a measure of asset protection from personal creditors of individual beneficiaries.

A holding company structure can separate control from economic benefit, allowing a business owner to retain voting control through one class of shares while transitioning the economic growth of the business to the next generation through another. Combined with an estate freeze transaction, this approach can effectively crystallize the current owner’s value in the business while directing future appreciation to successors, often with favourable tax consequences. These structures depend on early implementation well in advance of any triggering event, as their flexibility and tax advantages erode when planning is reactive rather than proactive.

4. Aligning Corporate and Estate Documents

As the first article in this series emphasized, corporate and estate planning documents must present a consistent and unified message. In the business succession context, that means ensuring that a shareholder agreement’s share transfer restrictions and buy-out obligations are directly reflected in, not contradicted by, the business owner’s Will.

Where a shareholder agreement gives co-shareholders the contractual right to acquire a deceased shareholder’s shares, a Will that purports to transfer those same shares directly to a family member will not override that contractual right: the corporate document governs. The beneficiary named in the Will may receive the proceeds of the buy-out, but not the shares. A business owner whose estate plan is not drafted with this understanding is likely to leave a plan that fails to deliver what it intended.

Where no shareholder agreement exists, the Will operates, but without the structural protections that a properly drafted agreement would have provided. In either case, reviewing both documents

together, and ensuring they work in the same direction, is not optional. It is the foundation of an effective succession plan.

How Procido LLP Can Help

At Procido LLP, our Wills and Estates Group and Governance Group collaborate directly to ensure that estate planning intentions are supported by corporate documentation capable of giving effect to those intentions. We work with accountants and financial advisors on the tax implications of holding structures, buy-sell funding strategies, and estate freeze transactions that can form part of a comprehensive succession plan.

The decisions explored in this article, including who inherits the business, on what terms, and through what structure, are among the most consequential a business owner will make. They affect not only the transition of the business itself, but also the relationships that survive it.

The earlier those decisions are made and formalized, the more options remain available. Contact Procido LLP to discuss how our integrated approach to wills, estates, and corporate governance can help you build a plan that protects both your business and your family.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice. Contact Procido LLP (www.procido.com) if you require legal advice on the topics discussed in this article.