When Must Confidential Business Records be Disclosed in Family Proceedings?

Broken Love sign representing confidentiality agreements in Divorce proceedings

Written on behalf of Shariff & Associates

A divorce imposes disclosure obligations on the spouses and the production of documents that can contain sensitive financial or business information. Third parties may also need access to the information to complete tasks such as valuing a spouse’s interest in a business. Understandably, parties prefer to keep this information confidential. If a spouse has access to information in a business capacity, will it need to be disclosed, and are there ways to ensure that sensitive information remains confidential?

Information Obtained as a Director May Not be Disclosed in Personal Litigation

The case of Saunders v. Mineault concerned the respondent’s interest in a law firm in which he was a partner. Under the terms of an earlier order, the respondent was to provide the applicant documentation needed to complete a valuation of his interest in the law firm. However, the documents were not provided on the grounds the law firm partners would not agree to the release of the information. The applicant did not agree the respondent could not provide the disclosure, as under Ontario’s Partnerships Act, he had access to the documents. The Partnerships Act provides that every partner may have access to and inspect partnership books.

The respondent pointed to Himel v. Greenberg, which dealt with the production of documents from non-parties. That case concerned a corporation under the Ontario Business Corporations Act and the applicant sought disclosure of documents relating to the spouse’s interest in a family business. He was a director of the company, and as the judge noted, he had access to the information that the applicant requested. However, he was “only entitled to these documents in his capacity as a director in the context of a bona fide exercise of his position as a director”. Justice Spies also explained that section 134(1) of the Ontario Business Corporations Act imposes duties on directors to act honestly and in good faith with a view to the best interests of the corporation.

Party Obligated to Provide Documents for a Business Valuation

An additional factor the court had to consider was the company’s shareholder agreement which provided for confidentiality, except for information that was required to be disclosed by law. The spouse was a party to the proceeding in his personal capacity and the company was not involved in the litigation. His obligation was to produce the documents in his personal possession and control. He did produce the documents that he was entitled to as a shareholder of the company. However, the fact that he had access to documents in his capacity as a director did “not permit him to obtain those for use in his personal capacity as a party to personal litigation”. That information was not required “by law” to be disclosed because the litigation was in his personal capacity. Justice Spies noted that there was a distinction between his personal capacity and his capacity as a corporate director. He was not required by law to disclose in personal litigation confidential information he acquired as a director.

In Saunders, the respondent argued that he was in the same position as the spouse in Himel, and that the same logic was applicable to the partnership. Ultimately, he claimed he was entitled to the partnership books in his capacity as a partner but could not disclose them in personal litigation.

The applicant argued that this case was distinguishable from Himel. First, the governing legislation in Himel was the Ontario Business Corporations Act. Also, there was a shareholder’s agreement in place that set out the obligations and entitlements of the shareholders. Finally, as a director of the corporation the spouse was entitled to more information than he could access as a shareholder. This was not the case under the Partnerships Act. In Himel, everything the spouse was entitled to as a shareholder was produced. This did not support the respondent’s position that he was unable to share the documents he was entitled to as a partner.

Court Finds Respondent Can Obtain and Disclose Required Information

Justice Engelking found that “unless some special provisions exist, either in an explicit or implied partnership agreement, or within the Partnerships Act itself, the Respondent can obtain and disclose any information to which he is entitled”. In Himel, the company was a party to the motion because the spouse was not entitled to the documents except in his capacity as a director. Conversely, in Saunders, the law firm was not a party to the motion. In fact, under section 24(9) of the Partnerships Act, the respondent did have the same level of control over the documents as every other partner had.

The respondent was obligated to prove the value of his interest in the partnership and the value of his income, and the respondent was specifically ordered to provide a business valuation report to the applicant. Justice Engelking had difficulty comprehending the failure to meet the disclosure obligations and the reluctance by the respondent or the law firm to provide the information due to confidentiality concerns. The judge noted the experts that were retained by the applicant and respondent were to sign confidentiality agreements protecting client and financial information. Justice Engelking granted the applicant’s requested order for the respondent to disclose the information required to conduct a valuation of his partnership interest and determine his income.

Party Uses Confidentiality Agreement to Limit Disclosure

Parties can use confidentiality agreements to keep sensitive information confidential and ensure it is used only in the course of family law proceedings. But any agreement should not be used to try to restrict necessary disclosure. In Bintas v. Bintas the applicant brought a motion for the respondent and a family-owned business to provide disclosure that her valuator requested. The respondent owned 25% of the company, and the valuator was retained to conduct an income analysis and report on the respondent’s interest in the company. The applicant had already signed a confidentiality agreement, and at the respondent’s request, her valuator was also asked to sign. However, the draft agreement described the valuator’s work as a “limited valuation of the company”. The valuator expressed concern that the phrase could restrict necessary work such as the income analysis and review of net family property. Following negotiations the agreement was signed. After delivering a signed copy, the applicant’s valuator requested the disclosure.

The company questioned why the applicant’s valuator required the information, suggesting it was not relevant to the valuation of the respondent’s interest in the company. The valuator replied that the information was required to analyze the respondent’s income, to determine the quantum of personal expenses paid by the company, and to assess the corporate pre-tax income available to the respondent. The judge found this was a satisfactory explanation, and the “type of disclosure requested is clearly relevant to the valuation and/or the income analysis”. This was particularly so as the respondent’s income was from a family company. The applicant also claimed that the respondent’s family cooperated with the respondent to “depress his income” when they became aware of the marital difficulties. Although the respondent denied that his income was intentionally being depressed, the judge noted that the applicant was entitled to dispute that and to pursue disclosure that would assist her in the litigation.

Family Law Rules Aim for Full and Fair Disclosure

In Cunningham v. LeFebvre the court noted that Rule 19 of the Family Law Rules provide for the disclosure of a range of documents with a view to full and fair disclosure. Additionally, in Marcoccia v. Marcoccia, the court concluded that broad disclosure is justified if there is concern about whether income has been reported accurately. When the applicant’s valuator made the original disclosure request, the company never questioned the relevance of the request. The judge felt that the later objection was an effort to restrict disclosure by arguing that the valuation that was to be undertaken was limited to a valuation of the business. Justice Horkins found this was incorrect, and that it was evident “that the Applicant requires an income analysis of the Respondent’s earnings from this family Company”. The disclosure the applicant requested was relevant to the valuation of the respondent’s interest in the company and his income for support purposes. These were material issues, and the judge decided it would be unfair for the applicant to proceed without the disclosure.

When considering the confidentiality agreement that the valuator signed, it specifically referenced conducting a valuation of the company. For the judge, it was obvious that the valuator was also conducting an analysis of the respondent’s income. To avoid any further dispute about the scope of work, the agreement was to be amended to also cover the income analysis. The respondent and the company were also ordered to provide the requested disclosure.

Confidentiality is Not a Reason to Avoid Disclosure

Disclosure obligations mean that parties may be required by a court to share financial documents and sensitive information, which can include business records. Sometimes company agreements may require the information be kept confidential, but even information that is meant to be private can be relevant to the financial issues in a divorce. Confidentiality agreements are one way information can be kept private.

Contact the Divorce and Separation Lawyers at Shariff & Associates for Advice on Equalization and Property Division

The experienced family lawyers at Shariff & Associates work with clients to resolve complex issues stemming from separation and divorce. Whether you have questions about separation agreements, child support claims, or asset division, our trusted team will help ensure you have all of the information you need to make informed decisions regarding your future. To review your concerns with one of our family law team members, please reach out to us online or call us at 905-591-4545.