To the other four minority owners who enjoyed the meteoric rise of Meddlin Hands Cleaning Products, when Lucy Knott sued their majority partner Tigh A. Knott for divorce, the divorce was anything but routine. Lucy wants half of the business and day to day participation. With no company agreement, the other shareholders face the prospect of an inexperienced partner they never selected. What are Meddlin Hands’ options?
Bleak. Without a company agreement, Meddlin Hands and Tigh A.’s other partners have limited choices – allow Lucy to own half of Tigh A.’s stock and participate in the daily affairs of Meddlin affairs, sell Meddlin Hands and divide the profits, or lend Tigh A. the money to buy out Lucy (at a price that is likely to be at a premium under the circumstances) to permit Tigh A. to remain a partner and serve on the board. Doing so allows the remaining owners to sidestep a disinterested and inexperienced spouse meddling in the business of Meddlin Hands. If Meddlin Hands has ready access to capital or credit, having the business lend Tigh A. half of his interest to purchase from his wife is the likely option. Still, the cash cost is not the end of the repercussions to the shareholders and the company – the detrimental effect upon Meddlin Hands’ reputation, the cooling of any interest from possible buyers, and the risk that all shareholders spend significant time in court dealing with aggressive tactics of divorce attorneys rather than tending to the day to day business of Meddlin Hands.
The rest of the story? Tigh A. and his wife reconciled. He later passed away, and Lucy became a shareholder and a board member anyway – with full majority control.
Tilting the Scales in Your Favor – A Business with Partners.
If your business has third party owners and is going to succeed, its long term viability requires adequate forethought that goes far beyond the LegalZoom.com formation. You need a good shareholder / company agreement. Failing to have a company agreement that makes adequate plans for death, divorce and disability, among other issues and risks, is likely to create problems for any successful business like Meddlin Hands. On the other hand, if your business is not successful, none of this matters.
More than just forming your business entity, whether you and your investors become partners, shareholder or members / managers, your operating agreements should include provisions to protect the interests of the other owners if one of the owners gets divorced, including considering:
- A requirement that unmarried shareholders provide the company with a prenuptial agreement prior to marriage along with a waiver by the owner’s spouse-to-be of his or her future interest in the business; or MORE LIKELY,
- A prohibition against the transfer of shares without the approval of the other partners or shareholders and the right, but not the obligation, of the partners or shareholders to purchase the shares or interest of one or both of the divorcing parties so that the other owners can maintain their control of the business, which should be signed by all of the spouses.
Tilting the Scales in Your Favor – If Your Business is Only You and Your Spouse.
If you own your own business, and whether you work with your spouse or not, and if you believe the business is likely to be successful, there are six key steps you should consider before and also after a divorce is filed –
- Plan Ahead. Sign a prenuptial, shareholder or buy-sell agreement
- Make Sure Your Lawyer is Working for You. Discuss how to streamline the process.
- A Team of Smart Advisers is Key. Double check your decisions with trusted advisers.
- Hire One Business-Valuation Firm. Accept the one value rather than fighting over two.
- Avoid the Two-Headed Monster. Rather than split the business in half, get creative with debt or other assets.
- Prepare for the Lasting Effects of Divorce. There are lasting emotional and financial effects of divorce. Figure out what you must do to stay focused.
Previous Tilting Articles: Protecting your Business from a Lack of “Wedded Bliss”; How to Dissolve a Business