There has been considerable speculation that one consequence of the Coronavirus will be an increase in the divorce rate resulting from togetherness imposed by the quarantine that pushes marriages already on shaky ground over the brink.  Whether divorces will increase in the future due to Covid-19 remains an open question, but what is certain is that a sizable number of future divorces will involve the transfer of a business ownership interest between spouses as part of the divorce.  To address this situation, this post focuses on key business issues that arise when one spouse (the “Divesting Spouse”) transfers an ownership interest in a business to the other spouse (the “Recipient Spouse”) as part of a divorce settlement.  Addressing these issues will help the Recipient Spouse continue to run the business successfully and also avoid future conflicts with the Divesting Spouse, as well as with future investors and potential buyers of the business.

1. Don’t Rely on Divorce Decree or Settlement Agreement to Document the Transfer of a Business Ownership Interest Between Spouses

A divorce decree and settlement agreement will document the terms of the divorce and the division of property between spouses, but it is not a good idea to rely on the decree or the divorce settlement to memorialize the transfer of a business interest between spouses.  There are a number of reasons for the Recipient Spouse to insist on securing a stock transfer agreement (or its equivalent), including the fact that the Recipient Spouse will likely be required to show the transfer document to third parties in the future, including banks or other lenders, new investors, company officers or managers, and potential future buyers.  The Recipient Spouse will not want to show the decree or settlement agreement to these third parties, however, because they include private matters unrelated to the business.  This will therefore require the Recipient Spouse to prepare a heavily redacted document for review by third parties.  It is more efficient to simply require a transfer document to be signed that is limited solely to issues related to the business.
Continue Reading Family Law: Transferring Private Company Interests in Divorce—Going Beyond the Basics to Ensure Continued Success and Avoid Conflicts

L to R: Tom Bronson, Ladd Hirsch

Recently I had the pleasure of sitting down for a virtual interview with my friend, Tom Bronson, as part of his Mastery Partners webcast series.   Tom has a wealth of experience helping business owners prepare to sell their companies, and we visited about how

In the midst of a global Pandemic that is devastating to the health of our community and to our economy, the last thing on the minds of private business owners may be the future sale of their company. But while business owners are sheltering safely at home as ordered, they may be wise to consider adopting a longer term view, and evaluating specific steps that would help to position the company for a future, profitable sale.

This post reviews potential hidden value in the business that the majority owner can bring to table to enhance its sale value, but which may not be reflected on its financial statements. This discussion does not present an exhaustive list, and instead, the purpose is to prompt a review of the company’s existing or potential business assets that may require further development after the Pandemic subsides and business activities are permitted to resume.
Continue Reading Unlocking Hidden Business Value: Securing Top Dollar by Giving Full Appreciation to All Available Assets On The Sale of a Private Company

“You can’t always get what you want
But if you try sometimes, well, you might find
You get what you need”

You Can’t Always Get What You Want, The Rolling Stones

In addition to Mick Jagger’s legendary performances on stage and vinyl, the song lyrics of The Rolling Stones reflect wisdom that often goes unappreciated. This post focuses on issues that arise when spouses divide their private company ownership interests in the context of family divorce proceedings. When the private company ownership stakes held by the couple are highly valued, there is a potential for a win-win property division and settlement in the best interests of both spouses. You Can’t Always Get What You Want therefore aptly describes the prospects of negotiating a successful Business Divorce in a marital divorce action.
Continue Reading Family Law: Getting What You Need in Divorce—When It Isn’t Possible to Get All That You Want

Navigating a successful business exit when a marriage ends in divorce often presents challenges for both parties. Leaving aside the emotional tensions present in divorce, resolving conflicts regarding the ownership of business interests in the marital estate is also daunting. This post therefore reviews options for divorcing spouses in their divorce proceeding. If couples can ratchet down the emotions and the acrimony, the tools discussed in this post may help allow the couple to optimize the financial outcome of their divorce settlement and preserve the value of the company they own or in which they share a large ownership stake.

The Valuation Dilemma

The most contentious business issue in many divorce proceedings is the value of the business that must be divided as part of the divorce settlement. Valuation is an inexact science, and the divorcing couple can easily spend hundreds of thousands of dollars on expert and legal fees battling it out over the value of one or more private companies included in the marital estate. This challenging issue is not subject to any easy fix. But there are some options the couple may want to consider before engaging in an expensive and time-consuming valuation battle.

(a) Marital Agreements.   Couples can eliminate the private company valuation battle by entering into a marital agreement that specifies what specific assets will be shared on divorce, or what amounts will be paid, and the agreement can also specific how the value of any assets will be determined. While a pre-nup is more common, couples can also agree to enter into a post-nup that details a property division and removes any conflict regarding the valuation of specific assets. Texas statutes set forth strict requirements to follow for marital agreements be enforceable. See Chapter 4 of the Texas Family Code

(b) Designated Valuation Expert. The couple can agree to pre-select and designate a valuation expert they both trust to conduct the valuation for them and to be bound by whatever value is determined by this mutual, trusted expert. Alternatively, there are variations on this approach, which give the couple the right to retain valuation experts if they don’t like the value that is determined by the designated expert and the results of these additional experts will then be averaged to determine the final value. 
Continue Reading Family Law Post–Maximizing Private Company Value in Divorce: Achieving a Successful Business Divorce When the Marriage Fails

By Ladd Hirsch[1]

“Water, water, everywhere,
And all the boards did shrink;
Water, water, everywhere,
Nor any drop to drink.”
The Rime of the Ancient Mariner, Samuel Taylor Coleridge, published 1798

This riveting poem by Coleridge relates the story of a sailor who is cursed for killing an albatross, which results in the ship’s crew nearly dying of thirst while they are surrounded by the great expanse of the ocean.  While not nearly as dramatic as this scene from the poem, divorcing spouses who own substantial interests in successful private companies do commonly experience a similar dilemma.  The couple’s interest in a private company may be a highly valued asset that is worth millions of dollars, but the spouses and the company lack the cash necessary to fund the purchase of the interest held by the selling spouse.   In the Coleridge vein, there is value value everywhere, but no cash to pay for it.  Without a creative solution in place, this lack of liquidity creates a significant problem for the divorcing couple in achieving a “just and right division” (as required by the Family Code) of what may be the most valuable asset in their marital estate.

A Road Less Traveled—Postponing Asset Division Can Pay Dividends

The conventional wisdom is that all marital assets must be divided at the time of divorce.  But, when a liquidity problem exists in divorce cases that involve the ownership interest held in a substantial private company, the best solution for the couple in some situations may be to continue their joint ownership of the business for a period of time.  This approach to the division of a marital asset can be termed a “phased buyout,” and this settlement structure provides the spouse who is acquiring the full ownership interest in the company (the buying spouse) with the time necessary to secure the capital  required to purchase the other spouse’s interest in the business (the selling spouse).
Continue Reading Family Law Post: The Liquidity Problem In Divorce Proceedings – High Value, But No Cash to Pay for Private Company Business Interest

By Ladd Hirsch[1]

Spousal consent provisions are commonly found in the governance documents of private businesses, e.g., corporate bylaws, limited partnership and LLC agreements.  Private company owners include these consent provisions in their agreements, because they do not want to find themselves suddenly stuck with a new business partner when one of their co-shareholders, partners or members goes through a divorce.  Whether the spousal consent provision will hold up in court when challenged by a spouse claiming unfair treatment, however, depends on a number of factors, and the frequent use of these provisions provides no safe harbor.

This post examines the legal considerations a court will focus on when a spousal consent provision is challenged in a divorce proceeding and also considers issues that arise when the company seeks to enforce the provision against a divorcing spouse.  We conclude the post by offering suggestions for drafting a more effective (enforceable) consent provision.
Continue Reading Family Law Post:  Till Death Do Us Part, But Will The Spousal Consent That My Spouse Signed in Our LLC Agreement Hold Up in Our Divorce

It is common for divorce settlements to include a transfer between spouses of an ownership interest in a private company, but the frequency of this transaction does not mean that it should be taken lightly. In fact, transferring a private company ownership stake in a divorce settlement often includes heightened business risks beyond the sale of a business interest between two unaffiliated parties.  This post therefore focuses on critical business risks present for both the spouse acquiring the ownership interest and the spouse who is transferring the interest in the company.  These business risks should be discussed with the spouses’ family law or business counsel to ensure that they are addressed in the parties’ divorce settlement.
Continue Reading Family Law Post: Transferring Company Ownership Interests in Divorce Settlements—A Transaction in Which Both Spouses Need to Exercise Significant Caution

Not so long ago, marital pre-nups were viewed as devices solely for use by the rich and famous, who never seemed to stay married for long.  In today’s world, however, couples from all walks of life face a myriad of important financial and personal issues that a pre-nup can help them to address.  Pre-nups can benefit both spouses, including by:
Continue Reading Family Law Post (Part 1) – Love Is Forever, But A Pre-Nup May Be The Better Bet: The Financial And Other Benefits Of A Marital Pre-Nup