Understanding the Involuntary Divorce Trigger
If you’ve been following along, we’ve been writing quite a bit about the various types of involuntary triggers that can impact the ownership of a business when one person’s ownership stake or shares are taken away due to certain circumstances. In this post, we’re going to focus specifically on divorce as a common trigger of an involuntary transfer.
What exactly is an involuntary divorce trigger? Essentially, it’s when a partner goes through a divorce and their shares are split up between them and their ex-spouse.
If this situation sounds untenable, you’re not wrong….
Getting Your Partner’s Shares Back from Their Ex
Read Transcript
Hi, thanks for tuning in to another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Continuing with transfers, today we’re talking about divorce.
Divorce represents another trigger where you want to have a sale of shares back to the partners in the event of a partner going through a divorce and that divorce resulting in a split of the shares from one spouse to both spouses.
You don’t want to be in business with this former spouse in 99% of the cases. I cannot see it happening as a positive thing. They might not be qualified, interested, they might not be available, focused, they might not fit into the culture. You might not like them, they might not like you. But in the meantime they’re going to have rights, privileges. They’re going to have rights of notice. They’re going to able to participate in the management and operations of the company. You don’t want a former spouse involved.
So you’re going to find that this is a trigger that will trigger a sale of the shares back to the partners based on the terms of the agreement. Every agreement I’ve ever read and reviewed is different. Some are better than others. Some are better than others. And so the devil is in the details and you want to make sure you get it right. We’re going to talk about the mechanics in another video, so stay tuned for that.
But just understand the concept that divorce is a very common trigger. One of the things to think about, though, is if the business or the partnership interest is owned by a company. So you have ABC Corp. and that’s how you own your interest in another company. Well, that’s not really going to be subject to divorce.
So you got to think it through and make sure that you’re tying your individual divorce – really the individual who is the partner – their divorce and their company, so that if they get divorced, their company has to sell back its interest. It’s actually quite challenging to do and it really needs a lot of thought to do it right.
Because if you just have a blanket divorce provision and you have a company ownership interest, it’s never going to get triggered. But that company ownership interest that owns the interest is still subject to the marital distribution rules and you could find yourself accidentally in the scenario that I’m trying to help you avoid now.
So hopefully you found this helpful. We’re going to continue to talk about some of the other triggers in the next few videos. Don’t forget to download some of the materials that are in the description, like our Business Planning Stress Test and our Formation Chart. There will be some other goodies as well that you will find helpful, I’m sure.
So thank you again for stopping by and stay tuned for more.
Here are those free materials mentioned in the video:
Florida Business Entity Comparison Chart
Now, back to the involuntary divorce trigger. To sum it up, you don’t want to be in business with a partner’s spouse – or, in this case, ex-spouse. It’s likely bad news. It’s likely he or she is not interested in the business, qualified to participate in the business, or possibly even a desirable person with whom to engage regularly in a business capacity.
What if that ex doesn’t want the shares or any involvement in the business? That’s not necessarily better, because they can then sell their share in the ownership to whoever they choose. Once again, putting you in business with someone you didn’t pick and who may not be right for the company or the culture.
Obviously, this is a situation that you typically want to avoid. Here’s the good news: it can be avoided.
How?
Identifying and Accounting for Triggering Events In Your Shareholder Agreement
The best way to deal with an involuntary divorce trigger is to do so before it ever happens. You do this by including language in your shareholder agreement that identifies and defines divorce as a triggering event, then adds in a requirement that the business be given the option to purchase back the shares – at fair market value and in installments that are low enough that they will not stretch the business’s cash flow.
This is both simpler and harder than it sounds. It comes down to making sure that you summarize and account for all of the associated notices and deadlines necessary to cover any parties that might be involved.
Here’s a basic example of the deadlines that might be included in a Shareholders’ Agreement document for an involuntary divorce trigger:
| Triggering Event |
Notice To Be Served By | Deadline for Notice | Deadline for Spouse | Deadline for Redemption | Deadline for Shareholder |
| Shareholder’s divorce | Shareholder or spouse | 30 days after suit served | 10 days after notice | 20 days after notice | 30 days after notice |
What Can Happen If You Don’t Adequately Account for Triggering Events Like Divorce?
A big mistake that we see companies making more and more is: they opt to use online discount services with templated business documents. Yes, these types of services can save you money up front – that is their main selling point.
But at what cost?
When involuntary transfers occur and businesses have not done a good job of defining their rights and how these types of situations will be handled, it is not uncommon for them to end up spending tens of thousands to fix the situation – followed by years of payments (yes, that money is in addition to those tens of thousands) – in order to buy out someone who became a surprise owner of their company.
This is what we’re working to help you prevent. Do the work up front, and you can keep these kinds of problem from destroying your business down the road. Proper planning, proper planning, proper planning. Take your cue from Nike and just do it.
Ready to learn more about how Haimo Law can help your business? Get in touch with an experienced Florida business planning attorney by contacting our office today.
Originally published 02/17/2022. Updated 03/26/2024.
Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com
YouTube: http://www.youtube.com/user/haimolawtv
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