“What You Need to Know When Your Business Partner is Getting a Divorce” by Attorney Jennifer Murphy, LL.M.

November 4, 2019

  1. The Company (and its financial records) will likely be involved in your business partner’s divorce proceedings. It does not matter how much of the Company your business partner owns, whether a minority or majority interest, the value of his or her interest in the Company will be part of your partner’s financial disclosure in the divorce proceedings. More importantly, the Company may be subpoenaed to produce records of the Company, such as bank account statements, tax returns, and other financial records, to verify whatever value your partner has assigned to his or her interest. Further, you may have to provide information and records to an expert business appraiser to properly value your partner’s interest in the business.
  2. Do you or the Company have any defenses to producing Company records in your partner’s divorce? You will likely have to produce any financial records that support or can be used to determine the value of the Company and, in turn, your partner’s interest in the Company. However, if producing any such documents would disclose business secrets, trade secrets, or other confidential information not generally known to the public, you may be able to limit the scope of the discovery requests. It is also possible to limit disclosure to the expert determining the valuation, but in such a case, you should ensure the expert has signed a confidentiality and nondisclosure agreement prepared by the Company’s attorney.
  3. Do you want to be in business with your business partner’s Ex? Marital property (generally, property acquired by either spouse during the marriage) is subject to equitable distribution upon divorce, which means that the court will attempt to divide the marital assets equitably between the parties. How does this affect you? Although courts usually try to divide the assets in a manner that awards an interest in a business to the spouse involved in that business, it is possible that the court could award all or a part of your partner’s interest in your company to your partner’s Ex, which means that you could end up in business with the Ex. To avoid this unfavorable result, you and your partner(s) should enter into an agreement (well before any divorce proceedings are initiated) that prohibits any transfers without the consent of the other partner(s), at a minimum.
  4. How can you prevent a non-partner from becoming a partner in your business? A well-drafted agreement among the partners or shareholders should preclude the ability of a non-partner Ex from acquiring an interest in the Company. Such an agreement should contain restrictions on transfers, including involuntary transfers, and other mechanisms to prevent an Ex from obtaining any interest in the Company in the event of divorce. In addition to any consent requirements, the partners should consider whether to include an automatic buy-out clause in the event of an involuntary transfer with the price and payment terms established in the agreement.
  5. Can your partner’s divorce interfere with the operation of the Company? Depending on how the business is structured and how much control your partner has on the day to day operations, the court can issue temporary orders that restrict or prevent your business partner (and the Company) from engaging in certain transactions or activity, such as making distributions or selling assets. Also, depending on the circumstances, including how contentious the divorce may be, the Company may want to consider limiting your partner’s management role and/or involvement in day to day operations until the divorce is finalized. A properly drafted agreement can include provisions to automatically or temporarily remove a partner from a management or board position during the pendency of a divorce.

Bottom line, having a well-drafted agreement that plans for the possibility of a business partner’s divorce can avoid or at least minimize many of these issues and the disruption to the business caused by a partner’s divorce.

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