And that is the way the cookie crumbles!
Dare Foods is a well-known, family-owned, Canadian manufacturer of cookies, crackers, breads and candy. Founded in 1889 in Kitchener, Ontario, the business has flourished with approximately $300 million in annual sales.
Carl Dare took over the business from his grandfather. When he had children of his own, he wanted to keep this successful business in the family. To that end, he transferred the future growth of Dare Foods to his children, Bryan, Graham and Carolyn, through an estate freeze. As part of the estate freeze, Dare and a holding company named Serad entered into a series of shareholder agreements. Carl Dare established a Dare family trust, which solely owned Serad’s shares. All three children signed the shareholder agreements as beneficiaries of the trust.
Carl’s intention was to keep the shares in the Dare family for the long term and dissuade his children from selling their shares to a third party. He tried to accomplish this goal through a right of first offer in the second shareholder agreement. The agreement did not require the children to purchase shares from one another, nor did it have a shotgun buy-sell clause. The agreement did contain a put right and gave his children the opportunity to purchase one another’s shares at fair market value before the shares were offered to a third party.
Bryan and Graham eventually joined the family business in the late 70s and early 80s. Carl became president, while Bryan became vice president and Graham executive vice president. They received salaries and annual bonuses.
Carolyn was never involved in Dare’s management or financial affairs, but she did receive an annual salary that increased over time.
In 1997 Carolyn met her second husband and they eventually moved to New Zealand. The couple had financial difficulties and in 2001 Carolyn sent a notice offering to sell her shares to Bryan and Graham for $39.6 million. They rejected her offer.
Instead, Carl proposed that Serad redeem 25% of her shares for $5 million, terminate her salary, and provide her with annual dividends of $335,000 for five years. The dividends would pay off the balance from a previous $400,000 loan that Carl had arranged for her. Carolyn agreed to this proposal.
Between 2004 and 2006 Carolyn had several discussions with her family about dividend payments and a possible buyout of her shares, but her family rejected any buyout offers.
In July 2014, Carolyn once again offered her remaining Serad shares to Bryan and Graham for $55 million. There’s no evidence explaining the value she proposed, how it was calculated, or whether the proposed amount represented the shares’ fair market value as contemplated in the second shareholders agreement. Again, Carolyn’s brothers rejected her offer.
In response to her brothers’ refusal to buy her shares, Carolyn’s lawyer threatened litigation alleging she had been
oppressed based on the provisions of the Ontario Business Corporations Act relating to the oppression remedy.
In June 2015, Carolyn started a claim (See Wilfred v. Dare et al., 2017 ONSC 1633 (CanLII). Carolyn argued that there should be a court-ordered buyout of her Serad shares claiming that her brothers’ conduct had been unfairly prejudicial
regarding her interest as a shareholder. She submitted that their refusal to purchase the shares combined with the lack of a third-party market for her shares and the irreconcilable differences between herself and the other Dare family members had the effect of holding her shares hostage and prevented her from realizing her assets at a time when she needed the money. She also alleged inequity in Serad’s dividend policy claiming she had no input into it.
Her brothers argued the action should be dismissed because that they had done nothing prejudicial or unfair. They submitted that Carolyn simply did not want to be a Serad shareholder and was trying to invoke the oppression remedy for that reason.
The court accepted Bryan and Graham’s position and indicated that the second shareholders agreement did not require the children to purchase shares from one another. Carolyn had obtained some partial liquidity when Carl arranged to have 25% of her shares redeemed, but there was no suggestion at that time that Serad would redeem the balance of her shares later, and there was no commitment to do so.
The court further commented that the oppression remedy found in the Ontario Business Corporations Act is not designed to relieve a minority shareholder from the limited liquidity of his or her shares, or to provide a means of exiting a corporation in the absence of any oppressive or unfair conduct. Carolyn’s arguments did not prove that there was any corporate mismanagement, improper dealing or any unfair conduct. As a result, there was no basis for relief under the oppression remedy. The court also found no unfair treatment as it related to the dividend arrangement.
Although he didn’t live to see it, Carl’s planning worked. The business remains in the hands of the family. However, one
of the company’s shareholders is disgruntled. Where do they go from here?
While life insurance to fund a buyout may have been proposed in the second shareholder agreement, most likely the purchase would not have occurred. Carl Dare did not want a buyout to occur; he wanted the business to stay in the family. As an advisor, you could be caught in the middle of a dispute like this. The Dare case is a good reminder that, even with a plan in place, all family members need to be on board with that plan, or litigation may result.
Unfortunately, sometimes family business disputes just cannot be settled without litigation and depending on your client’s goals, insurance may not be the right solution even though it has an important role in estate and legacy planning.