Business Owners Face Special Challenges In Divorce
Two years and three days after Frank and Jamie McCourt issued a statement to announce their separation, the McCourt’s issued a statement to announce a divorce settlement. Jamie McCourt who fought her ex-husband for half ownership of “their” baseball team, agreed to surrender the bankrupt team to Frank. She walked away with a promise — but not a payment — of about $130 million.
Unless you are baseball fan, this means little to you, right? Wrong. It is great example of the disaster that a dissolution proceeding can bring to a ‘family business.’ Most people aren’t squillionaires with mansions and baseball teams, but many people own their own businesses. One or both spouses works there and a divorce can create havoc.
In addition to problems between spouses who own a business together, there can be problems for third parties. Often two or more persons own and run a business together. One owner gets divorced and the other owners suddenly find themselves in a tough spot. The records of the business–particularly its profits or losses may be scrutinized in the divorce court case. The spouse of the owner will likely claim an interest in the business and may try to exert management control.
How can you avoid the drama? You can’t. But, you can avoid a disaster. How? With planning of course. Planning may include a prenuptial agreement and buy-sell agreements between owners of a business. It often includes both. A buy-sell agreement, also known as a buyout agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies, is forced to leave or chooses to leave the business. It may be thought of as a sort of as a prenuptial agreement between business partners/shareholders No matter how much you like your business partner’s spouse, you really don’t want him or her in the business.
We can help. If you own a small business talk with us about marital and business planning and exit strategies. If you are contemplating divorce discuss the particular challenges you face as a business owner.
Buy–sell agreements consist of several legally binding clauses in a business partnership or operating agreement or as separate agreement; it controls the following business decisions:
Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders);
What events will trigger a buyout (the most common events that trigger a buyout are an owner’s death, disability, or retirement. Less common and more problematic events include a desire of one owner to exit the company or an owner getting a divorce) and;
What price will be paid for a partner’s or shareholder’s interest in the partnership.
Buy-sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan if the business is a corporation. Not having a shareholder agreement which would dictate the purchase price of a departing shareholder is very common with small businesses. People often form a corporation with an online automated company or the like or by using the services of a company they found in a newspaper ad. This can be a disaster . If you have a business and you are not the sole owner, you owe it to yourself to make a plan.
Without a plan any shareholder who owns at least a third of the stock in a small corporation could force an involuntary dissolution pursuant to the California Corporations Code. Under such a proceeding, the remaining shareholders would be given the option to buy out the departing owner at “fair value.” “Fair Value” is subjective and has been the source of a lot of lawsuits. It is not “fair market value”which is more easily determined, but it is a starting point for negotiation.
Without a plan partners have no starting point. And that has been the source of a lot of lawsuits.
If you have questions regarding business planning, formation or dissolution contact us at 310 282 7521. We have experience dealing with legal issues which confront small business start ups and going concerns in a divorce context.