The Biggest Neglected Liability For Your Business
Written by Marcus M Sixta, BSW, JD
Family Lawyer, Accredited Mediator, Collaborative Divorce Lawyer
What is the biggest potential liability for your business? When asked this question some people will list off things like competition, loss of market access, or theft of intellectual property. Rarely do I hear divorce, but divorce is a huge business liability that is often overlooked. Short of not getting married, the best defence to this liability is a prenuptial agreement drafted by a lawyer with a practice focused in family law.
When a couple is planning their wedding, the subject of a prenuptial agreement can be an awkward discussion that distracts from the joy of wedding planning and creates unwanted tension. That may be why many people forgo a prenuptial agreement or fail to act until it is too late. This is a mistake, especially if you own a business. You need to act and act quickly. The earlier you start the process the better as duress can be an argument used to challenge a prenuptial agreement after separation and divorce if that agreement was drafted after the wedding venue is booked, guests are invited and food is ordered. Once financial and social commitments are locked in, the potential spouse may feel that they have little choice but to sign an agreement that they are not happy with. Better to start the prenuptial agreement long before the wedding.
Prenuptial agreements set out the division of assets, and sometime alimony or spousal support, in the event a couple gets divorced. They are signed before marriage with family lawyers and every country has different laws about how they are enforced and what you can include in them. Where a couple gets married and where they get divorced will have an impact on determining the correct jurisdiction and laws used to enforce a prenuptial agreement, but often these agreements include clauses that enshrine a preferred jurisdiction in order to avoid jurisdictional disputes in the event of a future divorce.
In Canada and much of the United States, all assets accumulated during a marriage are divided equally upon divorce. This includes any business assets and the business itself. Therefore, if a business was owned prior to marriage but the majority of the value of that business was generated after the date of marriage, this business may now be owned 50/50 between the divorcing spouses regardless of whose name is on the corporate documents or who is holding the shares.
In a divorce, the family lawyers for both parties will work together to determine the division of all family assets, including the matrimonial home, financial accounts, cars and any business interests. An equalization payment or property transfer can be made from one party to the other to equalize all assets and debts if there is an imbalance between the spouses. However, if the value of the business exceeds the rest of the family assets, the business may have to be divided.
Dividing a business between separating spouses can have a significant detrimental impact on the business. A new share structure may have to be created so as to include one spouse in order to give them half the value of the business. Assets may have to be sold off and retained earnings reallocated to pay off a spouse. Any business partners will have legitimate concerns and relationships may be negatively affected. Also, months or years of ongoing divorce litigation will create distractions that impede new projects or stop them all together.
A prenuptial agreement can be drafted so as to protect a business as separate property, property that is not to be divided in the event of separation or divorce. However, prenuptial agreements provide other benefits as well. They reduce conflict between the couple going through a divorce by clearly setting out the rules for the division of matrimonial assets and debts. They also significantly reduce the cost of divorce because the parties do not need to attend at a divorce court to sort out how their assets, including the business, will be divided.
Just like any contract, a prenuptial agreement must be drafted in a certain way in order to be enforceable and binding on the parties. A trained family lawyer should be used to draft the agreement, but here are some issues to keep in mind:
- Assets, including businesses, owned prior to marriage are usually not divisible after separation and divorce. The problem is that any increase in value of these assets can be divisible. Moreover, the assets that existed at the date of marriage must be proven, which can be a difficult task in a 30-year marriage. A prenuptial agreement will outline the assets owned at the date of marriage and attribute values to them.
- Full disclosure is a requirement so that the couple has an idea about what they are giving up by signing a prenuptial agreement. This is very important in high net-worth situations or if there is a business involved. A divorce court will be sympathetic to a spouse who says that they would not have signed the agreement if they had known how much they were giving up.
- Issues regarding children are not included in prenuptial agreements. Children’s needs change depending on changing circumstances and the family law courts will protect the interests of children. Therefore, ridged terms about custody and child support in the event of divorce or separation will not be enforceable.
- Terms that rigidly outline the responsibilities of the parties during marriage will not be enforced. This includes terms about who will wash the dishes and who will cook dinner.
- A prenuptial agreement should be fair. Some jurisdictions put more importance on this factor than others. Fairness depends on the circumstances during the marriage at the time of divorce. For example, it may not be fair for a spouse who has never worked outside of the home to receive zero alimony or spousal support after a 30 year marriage with children. Instead, different alimony scenarios can be included which are based on changing circumstances, like a lump sum of alimony which increases with the duration of the marriage.
- Each party should have their own family lawyer give them independent legal advice on the prenuptial agreement. This makes it much more difficult to later argue that there was a misunderstanding of the terms.
- Prenuptial agreements are signed in anticipation of marriage, but there are other types of agreements as well. These include post-nuptial agreements which are signed after marriage and cohabitation agreements which are for common law couples who do not intend on getting married. In many jurisdictions, common law spouses can claim a portion of the assets accumulated during the period of cohabitation.
No one enters into a marriage with the expectation of separation or divorce, but the reality is that in some countries the divorce rate is close to 50%. This is an extremely high level of risk for a business. A prenuptial agreement should therefore be seriously considered if you own, or are a partner in a business.
Marcus M Sixta, BSW, JD
Family Lawyer, Accredited Mediator, Collaborative Divorce Lawyer
Marcus is the owner of Crossroads Law, a boutique family law firm in Vancouver and Calgary. Marcus regularly litigates high net-worth divorce files and works with tax advisors, business valuators and forensic accountants to achieve successful outcomes for his clients.