Your Business Could Be in the Middle of Your Partner’s Messy Divorce
Posted by Sunshine, Isaacson & Hecht LLP on April 27th, 2016
The divorcing spouse has the right to argue that their direct and indirect contributions to the business attributed to its growth and success, if they can prove it. However, before even getting to the point where a judge determines whether the spouse made such contributions, the spouse will want to find out how much the business is worth—so that he or she knows what is at stake and whether it is worth fighting for.
Often, clients have a knee-jerk reaction, saying, “He or she had nothing to do with my business.” However, they are not considering that the court may include, as contributions:
- Raising children (so their spouse can put extra hours into the business);
- Grocery shopping and running errands (essentially taking on marital obligations so that the other spouse can spend more time growing the value of the business);
- Helping with administrative tasks at the business; and
- Financial contributions (such as loaning marital funds to the business).
Even if the business already existed at the time of the marriage, the divorcing spouse may be entitled to a share of the business based on the growth in value of the business during the course of marriage as a result of contributions they made.
In order for the spouse to accomplish this goal, someone will have to access the business records and try to value the company. However, business partners who are not involved in the divorce may not want to disclose their records. There is some question as to how much information the divorcing spouse is entitled to.
Does the business have an obligation to disclose information to the spouse?
In the eyes of the law, a business is supposed to be its own individual person or entity. Imagine your friend was going through a divorce, and you received a request from your friend’s spouse’s lawyer, asking for your personal financial information. Would you have to turn over the information? Would you retain your own attorney to protect yourself?
Now compare that scenario to a business entity who is asked to provide its financial information. While the court has far-reaching powers, does it have the ability to pull a non-interested third party into the mix and force them to disclose private information? What if that private information is a confidential client list, for example if the business is a law firm or a doctor’s office? These types of issues are regularly litigated, and while the divorcing spouse certainly has some right to some of the information, the business can make it difficult for the spouse to get that information, or there may be some information that the spouse is entitled to and other information that the spouse is not entitled to.
These issues can be difficult to navigate, and the courts are not necessarily applying a clear black-and-white rule as to how the issue is resolved. The divorcing spouse has rights, the business partners have rights, and the business entity has its rights, too. It’s a balancing act, but it also can be influenced in different directions depending on the judge’s opinion and the strategy chosen by the attorneys of the divorcing parties, the attorneys of the business partners, and the attorneys of the entity.
Is there any advice for a business partner who is going through a divorce?
Once you find yourself in the midst of divorce, there’s not much you can do. The best course of action is to plan in advance.
Business partners could include a provision in their partnership agreement that specifies an exact value or a formula for how each business partner’s share of the company should be valued in the event of a buyout, divorce, death, etc. If divorce is something that could be in the future for any of your business partners, this may be an issue that you want to address before it becomes a problem. Conversely, if the business and its partners were not proactive about describing how to calculate value in their partnership agreement, and a divorce disclosure issue has arisen, it may be best for the business not to rely on one partner’s divorce attorney, but instead, retain its own independent legal counsel to protect the rights of the business of the other partners.
There are many areas of matrimonial law that are black-and-white, but this is one of the gray areas. How will you protect your business assets from your partner’s divorcing spouse?
Joshua B. Hecht
Sunshine, Isaacson & Hecht, LLP