Avoiding a Surprise – and Potentially Unwanted – Business Partner

Any entrepreneur knows that a business’s worst enemy – but ironically, its greatest certainty – is uncertainty. And wisely seeks to structure partnership, shareholding and operating agreements to minimize it.
One business uncertainty that often gets overlooked, however, is the health and personal life of the owner him or herself. What happens to the business – and to any business co-owners or partners – if an owner experiences a divorce, dementia or another incapacity, or actually dies?
Who succeeds to ownership or partial ownership? Who takes control of decision-making? Let’s examine how to bring greater certainty to ensuring that you don’t end up with a surprise and potentially unwanted business partner. 

This month features a conversation with Tripp Scott Director Henny Shomar

Bill Davell:

What are some specific ways uncertainty can come to control a business? 

Henny Shomar:  

Some of the scenarios include:

• A business partner gets divorced or married, with the ex- or new spouse receiving an interest in the business,

• A couple who are business partners in an enterprise later divorce,

• A business partner dies or becomes mentally incapacitated, with his spouse, heirs, or guardian assuming his ownership in or control of/in the business.  

Bill Davell:

What are some of the actions my business can take to forestall these uncertainties? 

Henny Shomar:   

Pre- and post-nuptial agreements can establish how much — if any — of a business a spouse will receive in the event a divorce gives rise to disputed assets. These agreements can not only protect an owner of a business in which his or her spouse had no involvement yet claims an interest upon divorce, but also both members of a couple who own a business together. Equally important, any co-owner could use a pre-or post-nup to protect his or her business partners’ interests.

Governing or operating documents can be formulated or amended to delineate or instruct who besides the initial owners can own or buy shares.

Buy-sell provisions can be established to prevent the transfer of shares without the approval of the other owners. A buy-sell provision can also be formulated to establish ex-spouses or incapacitated owners as impermissible transferees and give co-owners the right to purchase their existing or putative interests. In addition, such agreements can require that a divorcing spouse automatically convert his stock or equity interest to a non-voting interest upon transfer.

Non-compete agreements inserted into the operating agreement can prevent widows/ widowers or ex-spouses receiving stock transferred by death or a divorce proceeding from competing with the business.

Transfer of decision-making authority. Provisions can also delineate that if a partner dies or is incapacitated, his or her decision-making authority, either overall or in specific areas, will automatically revert to an individual designated by the company, rather than to a spouse, beneficiary, guardian, or a court-appointed party. The business or its partners should in fact be proactive and designate specific individuals or officers by title to whom such decisions revert, and update those designations when there is a change in ownership or management. 

Bill Davell:

What if a business’s operating documents are already in place, or a married owner or partner does not have a pre-nup, and either co-owners or the spouse affected by a post-nup objects? 

Henny Shomar:  

Obviously changes to existing arrangements can be a source of tension and misinterpreted as distrust on the part of the person proposing changes. Such tensions are one reason to bring in an experienced attorney, who can present such changes not as the idea of one party but as protections for the business. And of course, many such changes in situation will have to be the subject of negotiation, with parties feeling disadvantaged potentially being offered consideration for assenting to changes.

 Attorneys are not only skilled in shepherding such negotiations but also in ensuring the right protections are chosen and are formalized in a way that both reflects the intentions of the parties and makes uncertainty at least somewhat less certain for its owners.

The attorneys of Tripp Scott’s Entrepreneurial Business Practice in particular understand the unique business challenges faced by companies during all phases of growth and have provided counsel to businesses at all stages of development, including appropriate formation structures. Learn more at:
https://www.trippscott.com/entrepreneurial-business, by calling 954-525-7500 or by using our contact page at https://www.trippscott.com/contact-us.