You, as corporate counsel, assured your client that in the event of a divorce, the methodology set forth in the corporate agreement (buy-sell, shareholder or partnership agreement) would protect the business and its shareholders, members or partners from having to pay a spouse more than one-half (1/2) of the shareholder, member or partner’s interest in the business as determined by the valuation set forth in the corporate agreement. Were you correct under California law?
Did you know that in California a corporate agreement signed by the shareholders, members or partners could be rendered meaningless in a divorce in terms of the valuation of the business? Yes, this could be the result for a variety of factual reasons but the failure to assure a properly executed Spousal/Registered Domestic Partnership (“RDP”) Consent should never become a reason why the corporate agreement is disregarded by the family court. This result is bad for the business and bad for the divorcing shareholder, member or partner.
Obtaining an executed Spousal/RDP Consent is important; however, the document must be executed in a way that will pass the muster of the court. As discussed in my last blog post Spousal Consent: Get it Signed! the signing of the Spousal Consent should be done in a way to give the spouse or RDP ample time to review the entire agreement and to either seek independent counsel or waive counsel.
Here are a few other things for corporate counsel to be aware of:
- Provide clear advice to shareholders/members about the signing. Corporate counsel should not become complicit in the culture of not providing the full agreement to the Spouse/RDP when they are asked to sign the Consent form out of fear that the Spouse/RDP will read the agreement and will know what is going on inside the business or providing the entire agreement “at the dinner table” without ample time for the Spouse/RDP to review and then sign. Rather, corporate counsel should educate the shareholders, members or partners of the risks of not getting the Spousal/RDP consent executed in the same fashion as any other contract. Failure to do so not only gives the shareholder, member or partner unrealistic expectations about the enforceability of the Consent but risks a breach of duty claim by the Spouse/RDP which could also result in the business being joined as a party to the divorce action.
- Provide clear advice about a valuation methodology which fails to include goodwill. Most of the reported cases in California addressing the issue of valuation of a business at time of divorce that results in a valuation different than the valuation in the corporate agreement involves the issue of goodwill of a business as an ongoing concern. Corporate counsel should counsel their clients that unless a valuation methodology of using appraisers to determine value including goodwill is included in the corporate agreement, that the valuation otherwise provided may not be the value utilized in a divorce. This is about setting reasonable expectations for the business and its shareholders, members or partners.
- Make Sure the Spousal/RDP Consent Is Signed. Corporate counsel should ensure this occurs, at the very least, with regards to the shareholders, members or partners that exist at the time of counsel’s involvement in the drafting of the corporate agreement. There is little that can be done in the future if counsel is unaware of new shareholders, members or partners being brought into the business, but as soon as involvement of counsel occurs, counsel should inquire. Do not rely on an electronically signed document marked “completed” by the electronic system but instead, the actual signature should be verified to in fact exist on the document.
The last thing a business wants is for it to be made a part of a divorce action. While no one can promise this won’t occur, why not implement best practices to mitigate the risk of such involvement?