Preparing for Business with Unforeseen Partners
When structuring partnership, shareholder and operating agreements, business owners try to address every reasonably conceivable situation. What often goes overlooked, however, are the effects on the business of divorce, dementia, or death — and the possible involvement of a surviving spouse, ex-spouse, or heirs.
This became clear with the major league divorce battle of the McCourts over the ownership of the Los Angeles Dodgers, and the contested dispute over the mental capacity of Donald Sterling to administer a family trust owning the Los Angeles Clippers. Both cases revealed how unplanned events can introduce unexpected partners or affect business decision making.
Situations can vary. It can be one of two or more business partners getting divorced or married, and the ex- or new spouse receiving interest in the business; a couple who are business partners in what becomes a successful enterprise, and who later divorce; or a business partner who dies, or becomes mentally incapacitated, and his spouse, heirs, or guardian assume his ownership and control in the business.
Whether before the business is formed, and after it is operational, proactively consider how the following documents can help ensure a smoother transition in ownership when unforeseen events occur.
- Pre- and post-nuptial agreements. These documents can establish how much — if any — of a business a spouse will receive in the event a divorce gives rise to disputed assets. This could protect a couple that owns a business together, or where one spouse owns a business in which the other had no involvement, yet the latter claims an interest upon divorce. This also could protect a third party with ownership equal to a party planning to marry or seeking divorce from his or her spouse and who potentially finds himself with a new partner.
- Corporate documents. Business records can be amended to delineate or instruct who can own or buy shares; establish buy-sell provisions against the transfer of shares without the approval of the other owners; and whether the owners may purchase ownership interest from either the ex-spouse, owner in question, or any other impermissible transferee. Buy-sell agreements also can require that a divorcing spouse automatically convert his or her stock upon transfer to stock with a non-voting interest. Non-compete agreements inserted into the operating agreement could prevent widows/widowers or ex-spouses receiving stock transferred by death or a divorce proceeding from competing with the business.
- Decision-making authority in death and mental incapacity. If a partner dies or their mental capacity is challenged, their decision-making authority may revert to a spouse, beneficiary, guardian, or a court-appointed party. Governing documents can instead establish who makes those decisions. Partners should proactively codify to whom such decisions revert in such situations in order to reduce risk and shareholder expense.
Corporate records generally are subject to review by future partners or investors, so discuss these matters with an attorney experienced in these areas. Pre-planning and agreements up front could help avoid a major league battle.
Douglas H. Reynolds is a director in the firm’s litigation department. He is Florida Bar board certified in both business litigation and marital and family law.
AV-rated director Henny Lawrence Shomar focuses his practice in complex commercial and business litigation, probate litigation, and marital and family law.
Learn more at www.trippscott.com.
Tripp Scott Law Firm
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