How to Protect Yourself if Your Business Partner is in the Middle of a Divorce

How to Protect Yourself if Your Business Partner is in the Middle of a DivorceA recent post in the Bangor Daily News in Maine discussed how business partnership contracts usually focus just on the partners – not their spouses. Under Tennessee divorce law, spouses going through a divorce generally have claims against their spouse/partner’s business interests. This interest can create many problems for the other owners. In some cases, if the agreement is not properly crafted, the spouse may be able to force the sale of the company. The spouse may be able to force the company to change some of its management policies. A spouse may even claim they should replace the other spouse as partner.

For example, if a husband and wife each own a home and a wife wants to keep the home – she may transfer her interest in a business to her husband – in order to keep the house.

The first task of any divorce is analyzing what property and debts are marital assets and marital debts, and which assets are separate property. Spouses can generally make claims against marital assets but they can’t claim separate assets. Whether a spouse has an interest generally depends on whether the spouse acquired the business interest before or after the marriage date. Even if a spouse began a business before marriage, the spouse may have a claim against the “increase in value” of the business.

How buy-sell or prenuptial agreements may help

One way partners in a business can protect themselves is through buy-sell agreements. These agreements normally set the contractual terms for what happens if a partner dies or wishes to sell his/her interest in the company. The agreement normally details:

  • How the value of the partner’s interest will be determined
  • Who has the right to buy the share of the partner who died or who is leaving
  • The rights of the new owner (of the partner’s share) in the control and decision-making part of the business
  • Other business-related matters such as retirement benefits and stock options

A buy-sell agreement can also set forth what happens if a partner divorces. One option is to state the rights of the other partners to buy the spouse’s interest in the event of a divorce. The terms need to be specific but this option can limit the right of the spouse of a divorcing partner to interfere with the business.

In a prenuptial agreement, the spouses must:

  • Make their agreement before the marriage begins
  • Agree what will happen to business interests that began before the marriage
  • Agree what happens to the increase in value in the business interest after the marriage

Like most agreements, there are always additional concerns. The spouse may claim the prenuptial agreement is invalid. Agreements after marriage, called postnuptial agreements, may be subject to legal challenges.

Even if there is an effective buy-sell agreement and/or prenuptial agreement, companies should have a plan in place to effectively manage the partner’s performance during a divorce. Divorce proceedings put a lot of stress on both spouses which can affect their ability to work. A wise company considers the best ways to help the partner work while also giving the partner the time and comfort to manage this emotional phase of life.

The Franklin family law attorneys at the Law Offices of Adrian H. Altshuler & Associates, understand that divorces affect more than just the spouses. They impact children, relatives, friends, and the people you work with. Our marital attorneys work to protect your financial interests and those of the people you care for. To understand your options and rights, please phone us at 615-977-9370 or schedule an appointment through our contact form. We represent people going through divorce in Franklin, Columbia, Brentwood, and other parts of Tennessee.