Publication Mar 2026

Family agreements: Key provisions regarding governance of multigenerational businesses

Charlie Kim, Amanda Laren Feigen & Matthew McGuigan

This story was originally published by Law360™ Canada, (www.law360.ca) a division of LexisNexis Canada.

By Charlie Kim, Amanda Laren Feigen, Matthew McGuigan and Jacquelyn Tran

In part one of this article, we discussed many key provisions that families should consider including in a family shareholders’ agreement (a “family agreement”) in the context of succession planning. In part two, we will discuss the following additional key provisions that can be addressed in family agreements:

1) Share transfer restrictions;

2) Funding of death taxes and life insurance;

3) Distribution policies; and

4) Family meetings.

Case study

Recall our case study: Family Co. was founded by Helen who represents the first generation (“G1”). Helen is contemplating transferring her ownership interests to her four children, Mark, Lily, James and Emily, who

represent the second generation (“G2”). Mark has taken an active management role in Family Co. Lily, James and Emily will be passive owners.

Below are some additional key provisions that Helen and her children should consider including in their family agreement.

Share transfer restrictions

Generally, family members want to ensure that the ownership of family businesses stays within the family. Therefore, family agreements will often include a general restriction on transfers of any shares by a shareholder without the consent of the other shareholders. However, for structuring and tax planning purposes, family agreements typically include an exception to this general restriction, allowing transfers to “permitted transferees,” such as: (i) lineal descendants; (ii) family trusts; (iii) family holding corporations; (iv) spousal trusts; and (v) affiliated or related entities. What ultimately constitutes a permitted transferee will vary from family to family.

Families should be aware, however, that courts have found that on the death of a shareholder, shares may be transferred pursuant to the shareholder’s last will and testament even if such transfer contravenes the share restrictions contained in the family agreement. To that end, families may want to consider including a provision in the family agreement that deems any transfer of shares in contravention of the family agreement to be an event of default, which entitles the non-defaulting shareholders to an option to buy out the defaulting shareholders’ shares. For more information, please see our previous article here.

Funding of death taxes and life insurance

The death of a shareholder can have significant financial implications for the individual’s estate. For example, when Helen passes, her estate will be deemed, for tax purposes, to have disposed of her assets at their then-fair market value. To the extent that the value of Helen’s shares of Family Co. increased in value during her lifetime, a capital gain will arise and Helen’s estate will be required to pay tax on such capital gain. Such taxes are referred to in this article as “death taxes.”

In many family-owned businesses, a shareholder’s primary asset is his or her interest in the business, which is generally illiquid. To mitigate this risk, the family agreement may require Family Co. to fund the portion of death taxes attributable to the value of Helen’s shares. To ensure Family Co. will have the cash necessary to fund that portion of Helen’s death taxes, the family agreement may require Family Co. to maintain one or more life insurance policies on Helen’s life.

When Helen dies, the proceeds of such life insurance will be paid to Family Co. as a beneficiary. Family Co. can then distribute such insurance proceeds to Helen’s estate (whether by paying a dividend to the estate or by repurchasing or redeeming the shares then owned by the estate), which the estate can use to cover the death taxes. Generally, Family Co. can add the life insurance proceeds, minus its adjusted cost base of the policy, to its capital dividend account, from which it can make distributions to the estate on a tax-free basis.

Distribution policies

The policy regarding the distribution of excess cash in the family business can be a sensitive issue. For example, in Family Co., Helen and Mark may prefer to reinvest any excess cash into Family Co. to support long-term growth, while the rest of G2 may wish to prioritize maximizing distributions for personal use. To address these conflicting expectations, it is important for families to establish a clear distribution policy in the family agreement.

The distribution policy should deal with both the amount and timing of distribution to the shareholders. The determination of “distributable cash,” that is, the portion of excess cash available from Family Co. to be distributed to the shareholders, is sometimes based on a formulaic calculation (i.e. per cent of net profits). Other times, distributable cash is left to be determined by the board of directors having regard to cash flow and reserves. The timing of distribution may be more frequent (i.e., monthly) or less frequent (i.e., annually) depending on the financial needs of the shareholders.

Family meetings

As the family expands from G1 to G2 and then to G3, there are many instances where only a few members of the family (and sometimes all within one side of the family) are involved in the active management of the family business.

In our case study, Mark is actively involved in managing Family Co., while Lily, James and Emily are passive shareholders who pursued careers outside the family business. In this common scenario, maintaining financial and operational transparency to all family members will be critical in avoiding potential misunderstandings and conflicts. This can be addressed by requiring regular family meetings where the management will review and discuss the affairs of the family business with family members, including financial performance and projections, investment opportunities, long-term strategic planning, corporate governance, corporate vision, mission, and values.

Conclusion

As multigenerational family businesses transition from one generation to the next, a family agreement is essential to act as a rule book for the family. Before transferring shares to the next generation, G1 and G2 should sit down and think through how they want the family business to run and how they want to govern the relationships among themselves. This article has provided various provisions that families should consider before putting pen to paper.

Charlie Kim is a partner in the Robins Appleby business and transactions group. His practice is focused on mergers and acquisitions, debt financing, private capital markets and shareholder and partnership arrangements in a Canadian, cross-border and international context.

Amanda Laren Feigen is a partner at Robins Appleby, which she joined in 2018. Prior to joining Robins Appleby, she practised tax law at a large national law firm, where she gained experience with mergers and acquisitions, corporate reorganizations, capital markets transactions, executive compensation matters, cross border matters, registered charities and not-for-profits and tax dispute resolution.

Matthew McGuigan is an associate in the Robins Appleby business and transactions group advising clients on mergers and acquisitions, debt financing, private capital markets and shareholder and partnership arrangements. His practice areas encompass the Canadian, cross-border and international context.

Jacquelyn Tran worked at Robins Appleby as a summer law student in 2024 and has returned as an articling student after graduating from the University of Western Ontario faculty of law in June 2025.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the authors’ firm, its clients, Law360 Canada, LexisNexis Canada or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice

At Robins Appleby, we have been providing legal advice for over 70 years to entrepreneurs, businesses, financial institutions, and foreign companies operating in Canada. Located in Toronto's financial district, our firm is trusted by clients to help solve critical, time-sensitive issues. We offer a wide range of legal services including business and transactions, affordable and social housing, litigation and dispute resolution, commercial real estate development, tax law, employment law, and estate planning.