Family-Owned Businesses and the Rights of the Next Generation's Spouses in Divorce and Death in Wisconsin
As a family business grows and is passed on to children and grandchildren, concerns arise as to the next generation’s and their spouse’s rights to own and control the business.
One of the primary concerns is the legal rights of spouses of next-gen owners in situations of divorce or death. Given marital property law in Wisconsin, a spouse of an owner could acquire ownership rights in the business simply by virtue of being married to a family member.
Therefore, it is important to address ownership issues proactively to clarify the roles of the next-gen owners and their spouses.
Is an Agreement to be Bound the solution?
There are two issues to consider with regard to the spouse of a family member:
* Could the spouse acquire a voting ownership interest in the company?
* Could the spouse acquire an interest in the value of the business to the extent that the spouse might be entitled to some form of payment for the value of his/her spouse’s interest, in a divorce or death situation?
If the earlier generation’s owners have concerns about these situations, an Agreement to be Bound, sometimes called a Spousal Acknowledgement Clause, is typically recommended.
The intent of such an agreement is to protect the financial interests of the business in the cases of divorce and death. Such agreements can be used to disclaim certain rights of the spouse to any marital or community property interest he/she holds in the next-gen family member’s interests. They also can be used to specifically acknowledge that the spouse has no right to participate in the management and control of the company.
Essentially, the spouse would waive his/her rights under marital property law, community property law, or other state or federal law to retain ownership interests in the family business. The Agreement to be Bound would prevail over other property laws.
What disclosures are needed to fully complete the Agreement to be Bound?
Prior to having the next-gen family member’s spouse sign the Agreement to be Bound, the family business may choose to make some disclosures to the spouse before the Agreement is executed.
Those disclosures could include the current ownership agreement and background information about the company’s activities such as a description of what it does, its holdings, and the applicable family members’ ownership percentages.
The business should keep a copy of what was disclosed along with a receipt reflecting that the spouse, in fact, received the items before signing the Agreement to be Bound.
Detailed financial information may or may not be warranted in this exchange of information, as this could be included in a Marital Property Agreement instead. However, if the financials are not revealed, the spouse could claim – mainly in the situation of divorce – that the agreement is unenforceable because he/ she did not understand its ramifications such as the value of the interests being waived.
An Agreement to be Bound serves a different purpose from a Marital Property Agreement. The former is simply an effort to ensure that ownership remains within the family. The issue of value and whether a compensating dollar amount might need to be transferred to the spouse would be left to the divorce or probate courts.
Is the Agreement to be Bound of no benefit to the spouse?
Unfortunately, a spouse (or future spouse) may be reluctant to sign an Agreement to be Bound and waive his/her financial interests in the business, fearing the loss of his or her rights. To minimize that reluctance, it’s important to make it clear to the next-gen family member’s spouse that the Agreement is beneficial for both parties.
For example, the Agreement to be Bound can stipulate a financial payout to the spouse in the case of a divorce or should the family member pass away. The Agreement can be tied directly to the governing documents of the business to address the percentage payout to the spouse.
Ideally, the Agreement will be signed prior to any marriage in the family, but can be done after marriage as well.
Is a Marital Property Agreement necessary to protect ownership of a family business?
Not all family business owners are concerned with the next-gen’s spouse’s rights to the business, and therefore do not insist on having any agreement with the spouse.
However, sometimes an Agreement to be Bound is insufficient and a next-gen owner wishes to prevent his/ her spouse from making any claim to the value of the business interest. In such instances, the concerned owner may wish to consult with an attorney to prepare a Marital Property Agreement (Prenuptial or Postnuptial ) or a Community Property Agreement.
This would require a specialized and individualized agreement, taking into consideration all financial circumstances of the couple (not just the family business), to be an effective means of waiving rights to both the control and value of the business owner’s interest.
The parties should have separate attorneys for Marital Property Agreements, and it is recommended that an attorney for the family business review all contracts pertaining to the business as well. It is important to ensure the business’s organizational documents and Marital Property Agreement agree with each other – and agree which document prevails as it relates to the family business. Contradictions or lack of clarity could result in a costly legal dispute.
The issue of the spousal rights of a next generation family member should be included in the organizational document for the business from the start. Additionally, if this issue is not clearly addressed, it is recommended that the governing documents be updated prior to adding a new owner of the business through an Agreement to be Bound.
While there are other options when it comes to spousal rights, the Agreement to be Bound is oftentimes the most workable solution for a family business. A Marital Property Agreement may also be useful to address the rights of each spouse to the value of the business.
For more information on Business Succession Planning, ownership agreements and other business legal matters, contact a Business Lawyer at Murphy Desmond S.C.
Published June 18, 2018