How can a partner’s divorce affect our company?

On Behalf of | Dec 1, 2022 | Business Disputes, Business Litigation, Outsourced Business Counsel |

Business partnerships are much like a marriage, especially when there are two co-owners. Regardless of how many partners there are, the others should generally try to support the one going through a divorce. Depending upon their marital arrangement and the business’s structure, things can get complicated, particularly if the wife has a claim on half the spouse’s stake in the company as a shared marital asset, which can happen even if the wife has no involvement in the business.

Unless arrangements are made at the beginning of the business to protect it from situations like divorce, it can become a headache for all the partners.

Potential issues to address

The partner may want to use a portion of their ownership stake as a significant payout to the wife rather than giving up other shared assets. It can lead to such problems as the company having a new and possibly unwanted partner, which can lead to some complications:

Voting rights: Owners play an important role in how businesses are run. Say the spouse is not interested in being a part of the company, but rather than sell it to current ownership, they may also sell it to another uninvited partner.

Valuation: The divorce agreement will value the partner’s stake in the business when dividing assets. The valuation process is often intrusive and can interfere with day-to-day work since employees or owners must provide paperwork to the divorce attorney or valuation expert.

Partner distraction: It may be a matter where the partner is so consumed with their divorce that they are not performing their regular duties. Worse, the divorce may get so bad that they consciously or unconsciously harm a business’s profitability to reduce the company’s value in the eyes of their spouse.

Other owners may need to step in

Along with supporting their friend and partner, the other owner or owners can take steps to protect the company from harm. It may be too late for a post-nuptial agreement, but a buy-sell provision in the formation documents may ensure ownership interest does not go to the spouse. If the spouse was active in the company, there might be a payout to them for their role. Another option is to preemptively change the types of shares, moving them from preferred to common, which eliminates the transfer of voting rights. Depending upon the circumstances, a confidentiality agreement may help protect the business from scandal and secure company secrets.

Partners with questions can discuss them with an attorney who handles business disputes and ownership issues. Whether negotiating a solution or protecting a business’s interests in court, they can be a tremendous asset.