LehighWoman.com Dec 2012/Jan 2013 | 19 legal The Paragon Centre 1611 Pond Road, Suite 300 ● Allentown, PA 18104 610-391-1800 ● 610-391-1805 fax New Jersey ● New York The Business Law Group at Norris McLaughlin & Marcus includes forty attorneys who spend all or most of their time in a variety of specialties within the field of corporate law. The range of clients is broad, as are the legal services provided to them. Day-to-Day Business Issues Contracts & Transactions Mergers & Acquisitions Business Finance & Securities Law Tax Law www.nmmlaw.com T he good news is, the number of women-owned businesses has grown substanally in recent years. The bad news is, so have the respon- sibilies and issues surrounding ownership of businesses. For many women, owning a busi- ness is a responsibility they share with family or friends. Small, closely held corpora- ons are more oſten affected by personal issues than larger businesses. This arcle explores a few strategies for minimizing the impact of breakup, falling out, divorce, or even death of a shareholder of a small business -- a common emoonal issue. Shareholders in a closely held business or partnership oſten establish the rights and ob- ligaons among them in a formal agreement, commonly referred to as a shareholder or buy/ sell agreement. These agreements may include restricons on the ownership or transfer of the business interests, calculaons for valuing those interests in certain circumstances, provisions for dispute resoluon, and protecons for the business in the event of a shareholder’s death or falling out. Increasingly, these agreements also contain provisions to protect the business in the event of a shareholder’s divorce. The effecve- ness of these provisions may vary widely depend- ing on the nature of the business and how the provisions are draſted. In the area of divorce in Pennsylvania, if a spouse acquires a business interest during mar- riage, it is usually considered a marital asset sub- ject to distribuon at the me of a divorce. The business interest generally needs to be valued during the divorce. A shareholder agreement that sets forth a parcular formula for valuing a share- holder’s interest in certain circumstances may not be sufficient to determine value in a death or divorce case, parcularly when the values or for- mulas expressed do not relate directly to current business operaons or worth. The Pennsylvania Supreme Court has held that shareholder or buy/ sell agreements are a factor to consider when as- sessing value in a divorce, but their terms will not necessarily control the issue of value. The IRS has espoused the same philosophy in valuing a busi- ness at death — the formula in the shareholder agreement is not necessarily controlling for death tax purposes. As a result, business owners may wish to consider some of the following opons when structuring or amending these agreements or when adming new shareholders. While all of these opons have associated risks, they can help to frame expectaons and reduce the potenal number of issues in the event of a shareholder dispute, divorce or death. One opon to protect the busi- ness in the event of divorce is to add a provision to the shareholder agree- ment that requires a shareholder ancipang marriage to execute a premarital agreement wherein his or her spouse-to-be waives any inter- est in the business. For potenal shareholders who are already married, a similar provision could be inserted to require, prior to closing on the new shareholder’s acquision, the execuon of a post-nupal agreement wherein the spouse waives his or her interest in the busi- ness. Provided such agreements are carefully draſted and contain accurate financial disclosures, their provisions should remain binding. Busi- nesses should also consider using a parcular agreement or aorney for the preparaon of these documents to ensure consistency among all agreements executed by those in that parcular business. While prenupal and postnupal agreements are among the most effecve ways of insulang a business, the negoaon of these agreements can be emoonal and can put shareholders in an uncomfortable and polarizing situaon. Moreover, if a couple has invested in the business together, such agreements may be inappropriate. Another alternave businesses can explore is to create specific shareholder agreement provisions regarding the busi- ness value in the event of a shareholder dispute or divorce, and then have all shareholders and the non-owner spouse give wrien consent to use these provi- sions. To maximize enforceability, this opon undoubtedly requires financial disclosure and an opportunity for the non-owner spouse to have independent counsel. Such provisions have not been tested by Pennsylvania appellate courts to date. Nevertheless, if appropriately prepared and accompanied by accurate disclosures, they should be enforceable. If this level of preparaon is not the right fit for your business, it is sll worth considering smaller steps that can help in the event a shareholder must undergo the business valuaon process. By way of example only, bear in mind that the non- owner spouse will be entled to certain informaon, and the business should consider building into its shareholder agreement cost allo- caon for the expense of producing the informa- on, as well as confidenality provisions. The nature and scope of a shareholder or partnership agreement will vary widely among businesses. There is no one-size-fits-all approach to their preparaon, and once prepared, these agreements should be reviewed oſten to ensure they suit the current needs of your business. All business owners should seek legal advice in the preparaon and revision of these documents to ensure they reflect your unique situaon. Lauren Sorrenno, Esquire, an associate in the firm’s Pennsylvania office, focuses her pracce on matrimonial and family law including divorce, equitable distribuon, alimony, prenupal and property selement agreements, child support, child custody, and protecon from abuse. She is acvely involved in the Pennsylvania Bar Asso- ciaon’s Family Law Secon and is currently a Council Member of the Secon. She previously served on the Execuve Commiee of the Phila- delphia Bar Associaon’s Family Law Secon and co-chaired the Secon’s Domesc Violence Com- miee. Lauren has published arcles on a variety of family law topics and served as a panelist at family law educaonal programs. Shareholder Agreements: Key to Protecting Business Ownership Interests by Lauren Sorrentino. Esquire
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
LehighWoman.com Dec 2012/Jan 2013 | 19
legal
The Paragon Centre1611 Pond Road, Suite 300 ● Allentown, PA 18104
610-391-1800 ● 610-391-1805 fax
New Jersey ● New York
The Business Law Group at Norris McLaughlin & Marcus
includes forty attorneys who spend all or most of their timein a variety of specialties within the field of corporate law.
The range of clients is broad, as are the legal servicesprovided to them.
Day-to-Day Business Issues
Contracts & Transactions
Mergers & Acquisitions
Business Finance & Securities Law
Tax Law
www.nmmlaw.com
The good news is, the number of women-owned businesses has grown
substanti ally in recent years. The bad news is, so have the respon-sibiliti es and issues surrounding ownership of businesses. For many women, owning a busi-ness is a responsibility they share with family or friends. Small, closely held corpora-ti ons are more oft en aff ected by personal issues than larger businesses. This arti cle explores a few strategies for minimizing the impact of breakup, falling out, divorce, or even death of a shareholder of a small business -- a common emoti onal issue.
Shareholders in a closely held business or partnership oft en establish the rights and ob-ligati ons among them in a formal agreement, commonly referred to as a shareholder or buy/sell agreement. These agreements may include restricti ons on the ownership or transfer of the business interests, calculati ons for valuing those interests in certain circumstances, provisions for dispute resoluti on, and protecti ons for the business in the event of a shareholder’s death or falling out. Increasingly, these agreements also contain provisions to protect the business in the event of a shareholder’s divorce. The eff ecti ve-ness of these provisions may vary widely depend-ing on the nature of the business and how the provisions are draft ed.
In the area of divorce in Pennsylvania, if a spouse acquires a business interest during mar-riage, it is usually considered a marital asset sub-ject to distributi on at the ti me of a divorce. The business interest generally needs to be valued during the divorce. A shareholder agreement that sets forth a parti cular formula for valuing a share-holder’s interest in certain circumstances may not be suffi cient to determine value in a death or divorce case, parti cularly when the values or for-mulas expressed do not relate directly to current business operati ons or worth. The Pennsylvania Supreme Court has held that shareholder or buy/sell agreements are a factor to consider when as-sessing value in a divorce, but their terms will not necessarily control the issue of value. The IRS has espoused the same philosophy in valuing a busi-ness at death — the formula in the shareholder agreement is not necessarily controlling for death tax purposes.
As a result, business owners may wish to consider some of the following opti ons when structuring or amending these agreements or when admitti ng new shareholders. While all of
these opti ons have associated risks, they can help to frame expectati ons and reduce the potenti al number of issues in the event of a shareholder dispute, divorce or death.
One opti on to protect the busi-ness in the event of divorce is to add a provision to the shareholder agree-ment that requires a shareholder anti cipati ng marriage to execute a premarital agreement wherein his or her spouse-to-be waives any inter-est in the business. For potenti al
shareholders who are already married, a similar provision could be inserted to require, prior to closing on the new shareholder’s acquisiti on, the executi on of a post-nupti al agreement wherein the spouse waives his or her interest in the busi-ness. Provided such agreements are carefully draft ed and contain accurate fi nancial disclosures, their provisions should remain binding. Busi-nesses should also consider using a parti cular agreement or att orney for the preparati on of these documents to ensure consistency among all agreements executed by those in that parti cular business.
While prenupti al and postnupti al agreements are among the most eff ecti ve ways of insulati ng a business, the negoti ati on of these agreements can be emoti onal and can put shareholders in an uncomfortable and polarizing situati on. Moreover, if a couple has invested in the business together, such agreements may be inappropriate.
Another alternati ve businesses can explore is to create specifi c shareholder agreement provisions regarding the busi-ness value in the event of a shareholder dispute or divorce, and then have all shareholders and the non-owner spouse give writt en consent to use these provi-sions. To maximize enforceability, this opti on undoubtedly requires fi nancial disclosure and an opportunity for the non-owner spouse to have independent counsel. Such provisions have not been tested by Pennsylvania appellate courts to date. Nevertheless, if appropriately prepared and accompanied by accurate disclosures, they should be enforceable.
If this level of preparati on is not the right fi t for your business, it is sti ll worth considering smaller steps that can help in the event a shareholder must undergo the business valuati on process. By way of example only, bear in mind that the non-owner spouse will be enti tled to certain
informati on, and the business should consider building into its shareholder agreement cost allo-cati on for the expense of producing the informa-ti on, as well as confi denti ality provisions.
The nature and scope of a shareholder or partnership agreement will vary widely among businesses. There is no one-size-fi ts-all approach to their preparati on, and once prepared, these agreements should be reviewed oft en to ensure they suit the current needs of your business. All business owners should seek legal advice in the preparati on and revision of these documents to ensure they refl ect your unique situati on.
Lauren Sorrenti no, Esquire, an associate in the fi rm’s Pennsylvania offi ce, focuses her practi ce on matrimonial and family law including divorce, equitable distributi on, alimony, prenupti al and property sett lement agreements, child support, child custody, and protecti on from abuse. She is acti vely involved in the Pennsylvania Bar Asso-ciati on’s Family Law Secti on and is currently a Council Member of the Secti on. She previously served on the Executi ve Committ ee of the Phila-delphia Bar Associati on’s Family Law Secti on and co-chaired the Secti on’s Domesti c Violence Com-mitt ee. Lauren has published arti cles on a variety of family law topics and served as a panelist at family law educati onal programs.
Shareholder Agreements: Key to Protecting Business Ownership Interestsby Lauren Sorrentino. Esquire
Related Documents
