Two related companies, one ownership structure nobody had reconciled

The situation

Willem and Mathan had been more than business partners for most of the last decade; they were brothers-in-law, Willem married to Mathan's sister, and the two families spent most holidays together. Willem ran a construction company in Orillia with about twenty staff and revenue in the higher end of the mid-market range, work he had built from a two-truck operation into a company that handled commercial builds across the region. Mathan, a specialist physician, had invested in the company early on and, over the years, had also set up a separate holding company that owned the land and equipment the construction business used, a structure their original advisor had suggested for liability reasons and that nobody had revisited since.

The plan, as Willem understood it, was straightforward. He wanted to consolidate ownership so that his construction company and Mathan's holding company sat under a cleaner structure ahead of a bank refinancing, exchanging shares between the two entities so that ownership lined up with how the businesses actually operated day to day rather than the informal arrangement they had drifted into. Mathan's accountant, Senthil, had recommended a tax-deferred share exchange to accomplish this without triggering an immediate tax bill on the value that had built up in either company over the years.

The file had originally been set up with another lawyer, who had drafted an initial share exchange agreement before leaving the firm partway through the engagement for reasons unrelated to the file. Willem inherited the file mid-stream, along with a set of corporate records for both companies that he was told were in order. He came to us to finish what had already been started, expecting the remaining work to be largely administrative: finalize the exchange documents, register the transaction, and move on to the refinancing.

That was not what a close read of the file showed. Before finalizing anything on an inherited file, our practice is to independently verify the corporate records rather than take the prior draft's assumptions at face value, precisely because a transaction built on an incorrect premise cannot be fixed by proceeding carefully; it has to be caught before it closes.

What the documents showed

The minute books for both companies told a different story than the one Willem and Mathan believed. Mathan's holding company, the one meant to be receiving shares in the exchange, had never properly issued the shares it was supposed to have issued to Mathan when it was originally incorporated years earlier. A share certificate existed, but the corresponding board resolution authorizing the issuance was missing, and the company's securities register did not reflect Mathan as a shareholder of record at all. In practical terms, the company everyone assumed Mathan owned outright had no clean paper trail showing that he did.

This mattered enormously for the planned exchange. A tax-deferred share exchange under the relevant provisions of the Income Tax Act depends on the transaction being properly structured and executed between parties who actually hold the shares being exchanged, with specific elections filed and specific conditions met. If Mathan did not, on paper, actually own the shares the exchange was meant to transfer, the entire transaction risked being invalid from the outset, which would have meant no tax deferral at all, and potentially a fully taxable disposition assessed against a transaction that both companies would have believed, in good faith, had qualified for deferred treatment.

The construction company's records had their own gap. Willem had brought in a silent investor several years earlier through what he described as a straightforward share purchase, but the resolution documenting that issuance had never been signed, only drafted and set aside. The investor had been receiving distributions consistent with a shareholder for years, based on an arrangement that, strictly speaking, the corporate records did not support. Under the Business Corporations Act (Ontario), shares are issued when the directors authorize the issuance by resolution and the company receives the consideration for them; a signed cheque and a drafted document that nobody ever executed do not, on their own, make someone a shareholder of record, whatever the parties believed they were doing at the time.

Neither gap had caused a problem yet, because nobody outside the two families had ever had reason to scrutinize the records closely. A share exchange transaction, filed with the tax authority and reviewed by a bank as part of a refinancing, was exactly the kind of scrutiny that would have found both gaps at the worst possible moment, mid-transaction, with financing timelines already running and two family relationships depending on getting it right.

What we did

1. Conducted a full independent review of both companies' minute books before relying on anything in the inherited file. Rather than proceed from the prior lawyer's draft agreement, we treated the file as needing verification from the ground up, since an inherited transaction carries whatever assumptions the previous file made, and this is what surfaced the missing share issuance in Mathan's holding company and the unsigned resolution in Willem's construction company before either became a closing-day surprise.
2. Confirmed the gap with Senthil before raising it with the family. We worked with Mathan's accountant to understand what tax filings had been made on the assumption that Mathan held the shares in question, since correcting the corporate record after the fact could trigger its own downstream tax consequences that needed to be mapped out before anyone took action or said anything to Willem and Mathan.
3. Corrected the share issuance in the holding company by reconstructing the missing authorization. We prepared the board resolutions that should have been passed when the shares were originally meant to issue, updated the securities register to reflect Mathan's ownership as of that date, and assembled documentary evidence, tax filings, bank records, and years of conduct, showing the parties had always treated him as the owner. A correction like this has to rest on evidence of what was actually agreed and acted on before it can be relied on for a transaction the tax authority may later review.
4. Formalized the silent investor's position in the construction company. We prepared and had signed the resolution that should have accompanied the original share purchase years earlier, confirming the investor's shareholding on terms consistent with what had actually been paid and received, closing the second gap the same way and removing a second source of exposure from the transaction entirely. Left unaddressed, that gap would have meant years of distributions to an investor with no corporate record explaining his entitlement, a problem that tends to surface at the worst possible moment, such as a dispute or a sale.
5. Explained the risk to Willem and Mathan directly, in plain terms, before proceeding. Both men needed to understand that the exchange, as originally drafted, could have exposed both companies to an unintended tax bill in the low hundreds of thousands of dollars had the ownership defect surfaced after closing rather than before, which reframed a paperwork delay as time well spent rather than an unwelcome setback neither of them had budgeted for.
6. Re-drafted the share exchange agreement to reflect the corrected ownership structure. With both companies' records now accurate, we rebuilt the exchange documentation from a clean foundation rather than layering a correction onto the prior lawyer's draft, reducing the risk of a further gap being carried forward unnoticed into a transaction the bank would later be reviewing closely. Starting over also let us align the representations and warranties with the corrected ownership record, rather than patching language built around facts that turned out to be wrong.
7. Coordinated the filing of the appropriate tax elections with Senthil. Once the corrected structure was in place, we worked with the accountant to ensure the elections required to support tax-deferred treatment were filed correctly and on the timeline the exchange required, completing the transaction on the footing it had always been meant to have from the outset. Missing an election deadline, or filing one that no longer matched the corrected structure, would have undone the benefit of fixing the ownership records in the first place.
8. Briefed the bank's commercial lending team on the corrected structure ahead of the refinancing. Rather than let the bank discover the earlier defects independently during its own diligence, we proactively explained the correction that had been made and why, which turned a potential red flag into a demonstration of careful governance and kept the refinancing timeline from slipping further than the exchange delay had already pushed it.

The outcome

The share exchange closed roughly two months later than the original timeline had projected, the direct cost of stopping to correct two ownership defects before proceeding. That delay pushed the bank refinancing back as well, which meant carrying the company's existing financing terms slightly longer than planned, a modest but real cost Willem absorbed as the price of doing the transaction properly.

What the delay avoided was considerably larger. Had the exchange proceeded on the original file and the ownership defect in the holding company surfaced afterward, whether through a tax authority review, a future sale, or Mathan's own estate planning years down the line, the companies would have faced an unwound transaction, a retroactive tax assessment, and a much harder correction to make after the fact than before. Prevention, in this case, meant a problem that never had the chance to happen rather than one that was managed after the fact.

The corrected records also resolved a smaller, quieter risk neither Willem nor Mathan had thought to worry about: the silent investor's position in the construction company, undocumented for years, now had a clean paper trail that would matter considerably if the investor's own estate or a future sale of the company ever put that shareholding under scrutiny. Willem and Mathan have since adopted an annual practice of reviewing both companies' corporate records together with Senthil, a habit that grew directly out of discovering how much had been assumed rather than confirmed in the years before.

The refinancing itself closed without further complication once the bank had reviewed the corrected structure, and the bank's lending officer specifically noted, in a conversation Willem later relayed to us, that the clean documentation made the file easier to approve than most. What began as an inherited file with a rushed, half-finished draft ended as a structure both families could point to with confidence, and a working relationship between Willem and Mathan that, if anything, came out of the correction with more trust rather than less, precisely because the problem was caught and fixed before it ever had the chance to become a dispute between them.

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