Post 5
This will be a multi-post blog entry. This fifth post discusses spousal consents in the context of governing documents, a lack of which may entitle an outgoing spouse in a divorce, to a share in the Business ownership.
Post 5 – Spousal Rights to Company Ownership in case of Divorce
When individuals form a new Business or enter into an existing one, the business owners initially deliberate upon their inter se rights, powers and roles in running the Business. In the process, an issue often not thought about, is for the business owners to procure their respective spousal consents that would preclude each owner’s spouse from making a claim in the Business ownership, in case of a future divorce. Generally, in a divorce each spouse is entitled to one-half of the community property and an owner’s ownership interest in a Business will typically be presumed community property. By taking certain steps, however, business owners can protect their business interests from spousal claims, even though ownership interests are classified as community property.
Business Law: The Texas Business Organizations Code (TBOC) provides that upon a member’s divorce, the member’s spouse becomes an assignee of the member’s ownership interest in an LLC. As an assignee and in the absence of a contrary agreement, the spouse may (a) become entitled to receive distributions, allocation of income, gain or loss; (b) ask for information regarding business transactions; and (c) inspect books and records of the Business. In an adversarial situation, these acts of a spouse may disrupt the day-to-day running of the Business. But note that this is only a default rule which can be modified. TBOC allows an agreement “for the purchase or sale of a membership interest at any time, including on the … divorce of an owner of the membership interest”. [1] Accordingly, members may expressly agree with her/his spouse, for her/his membership interests to be dealt with separately, instead of being automatically assigned to the outgoing spouse (in case of a divorce). It is therefore important that members have these consents and related enabling provisions in governing documents of their Business. In no event can a spouse, upon divorce, become a member of a LLC by default, unless other members of the LLC consent[2].
Similarly, for a shareholder of a corporation to have these protections, the corporation’s bylaws must contain restrictions as agreed amongst shareholders in a shareholders’ agreement that precludes a default transfer of interest to an outgoing spouse of a shareholder.
Family Law: For the purpose of Texas Family Code, ownership interests of a member or shareholder (i.e. LLC units or shares) will be presumed community property[3] at the time of divorce, unless it can be proven otherwise. In order to avoid a claim over these Business interests, the business owner must have a premarital or marital property agreement, which will “waive [or] release … a claim for economic contribution, reimbursement, or both”. [4] It therefore becomes critical to have an effective marital property agreement built into the governing documents of a Business or as a separate document that effectively waives spousal claims over a member’s Business. This will ensure a business owner’s interests are adequately protected.
Our next post will discuss certain unexpected outcomes in the event a company agreement does not provide methods of resolving deadlocks.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
Saurabh Nathany – Saurabh Nathany is a Paralegal at The R. Shawn McBride Law Office, P.L.L.C. Saurabh can be contacted at: (312) 394-9924, or [email protected].
[1] See TEX. BUS. ORG. CODE § 101.1115(b)
[2] Id. § 101.109(b)
[3] Id. § 3.003(a)
[4] Id. § 3.410