Client Page
Is Your Business Safe From a Divorce?
What you need to know about shareholder, partnership, and buy-sell agreements.
By Taylor Imel
Texas is a good place to do business. No corporate or individual
income tax and a simplified regulatory system have made Texas a haven
for small-business owners and entrepreneurs. According to the U.S. Small
Business Administration, Texas small businesses employed roughly 4.7
million people in 2015, or 45.6% of the private workforce in the state.
Often, the ownership interests of these small businesses account for the
largest asset of a Texas family both in terms of value and the income
generated from the same—which is why they are some of the most highly
contested issues in a divorce suit.
Is a business owner’s interest in his or her company protected from
the warring spouse? The answer is complicated. More often than not, the
actual interest in the company or partnership is protected from
disposition to the other spouse by the various entity agreements. But,
are the provisions in these entity agreements sufficient in the event of
a divorce, particularly the valuation of the community estate’s interest
in the corresponding entity?
The law is unclear on this matter. Texas appellate courts are split on
the controlling nature of such agreements, and the Texas Supreme Court
has yet to weigh in on the issue.1 However, despite the
apparent conflict, each appellate decision seems to indicate that entity
agreements containing buy-sell provisions specifically providing for
valuation of the partner/shareholder’s interest in the event of a
divorce may in fact be binding on the non-owner spouse, provided that
the triggering event has occurred and the provisions regarding valuation
have been followed by each shareholder/partner on a consistent basis.
But divorce provisions in such agreements often have not been drafted
correctly to bind the non-owner spouse to the agreement. Most fail to
define when the divorce provisions are actually triggered (i.e., upon
the filing of a divorce), and many include inappropriate standards of
value that are either outdated or are designed to deprive the non-owner
spouse of a fair value. While no Texas court has to date clearly
outlined the requirements for binding a non-owner spouse to a buy-sell
agreement in the event of a divorce, extraordinary care should be taken
when incorporating divorce provisions in such agreements to best ensure
their enforceability and to prevent costly litigation.
Divorce is a reality for nearly half of all families in the U.S. For a
small-business owner, the divorce process can severely disrupt the
ongoing nature of the business. Formal valuations and forensic analysis
of the financials of a closely held company or partnership during a
divorce are invasive, time-consuming, and expensive. Given the split
nature of the appellate courts in Texas, it is essential that divorce
provisions are not an afterthought in the drafting of buy-sell and other
entity agreements. Consulting with a family law practitioner adept at
reviewing and crafting such provisions could potentially save tens of
thousands of dollars in future legal fees and greatly reduce the overall
instability and disruption to a business during a
divorce.TBJ
TAYLOR IMEL
practices
family law at KoonsFuller in Houston, where she focuses on complex
property division and highly contentious custody cases, both at the
trial court and appellate levels. She is certified in family law by the
Texas Board of Legal Specialization.
