Insights | Dimitra Tzortzatos
The Shareholder’s Divorce
When Corporate Governance and Matrimonial Law Collide
By Dimitra Tzortzatos
A closely held business may be owned by one spouse, governed by a detailed operating or shareholder agreement, and subject to strict transfer restrictions. When the owner divorces, however, those protections do not necessarily answer the questions raised in the matrimonial action.
What is the business worth? Is any portion of its appreciation marital property? Does a valuation provision in a shareholder agreement apply in the divorce?
These questions arise where corporate governance and matrimonial law intersect.
Ownership Is Only the Beginning
Business owners often assume that the issue is straightforward: “The shares are in my name.”
Legal title does not end the analysis.
A business interest acquired during the marriage may constitute marital property even when only one spouse appears on the company’s records. A business owned before marriage is generally separate property, but an increase in its value can become an issue when the appreciation resulted, in part, from the contributions or efforts of the other spouse.
Those contributions do not have to occur inside the business. A spouse who never worked for the company may claim that contributions made at home allowed the owner to devote the time and effort necessary to grow it.
The dispute therefore extends beyond ownership. It requires an examination of when the interest was acquired, how its value changed, what caused that change, and whether either spouse contributed to it.
Corporate Agreements Serve a Different Purpose
Operating agreements, shareholder agreements, and buy-sell agreements govern the company and its owners. They may restrict transfers, establish rights of first refusal, provide valuation procedures, or determine what happens when an owner dies, retires, or leaves the business.
A divorce raises different questions.
A transfer restriction may prevent a nonowner spouse from becoming a shareholder, but it does not necessarily eliminate a financial claim against the value of the owner’s interest. Likewise, a valuation provision written for a voluntary sale, death, or departure from the company may not resolve the value of the interest for equitable-distribution purposes.
The language, purpose, triggering event, and parties bound by the agreement all matter. Corporate documents must be examined in context and in conjunction with the court’s obligation to identify, value, and distribute marital property.
The Planning Cannot Be Divided
Business and matrimonial planning are too often handled separately.
Corporate counsel prepares the operating or shareholder agreement. An estate-planning attorney develops the succession plan. A matrimonial attorney is consulted only when a marriage or divorce is imminent. By then, the documents may contain inconsistent valuation provisions, incomplete protections, or assumptions that fail to account for divorce.
The company’s governing documents, ownership restrictions, succession plan, and any prenuptial or postnuptial agreement should operate as parts of a coordinated structure.
A shareholder’s divorce is a family event, but it is also a business event. It can affect value, liquidity, operations, confidentiality, and relationships among owners.
Protecting the client requires an understanding of both.
About the Author
Dimitra Tzortzatos is a Partner at Davidoff Hutcher & Citron LLP, where she practices commercial litigation, matrimonial law, and family law. Her practice frequently involves the intersection of business, financial, and family law issues.
This article is provided for general informational purposes only and is not intended to constitute legal advice or create an attorney-client relationship. The information provided may not apply to your particular circumstances. You should consult an attorney regarding your specific legal situation.