There is always excitement in a family when a son or daughter comes home and says they have found the love of their life and are getting married. Compound that with an expectation of having grandchildren and everyone cannot wait to see their families grow.
If you are a business family and your intention is to pass on your enterprise on to your children and grandchildren, your level of excitement may be subdued when you start to think about what might happen to your business should your child become separated and ultimately divorced. You probably intend on being fully supportive (emotionally and financially) of your child and his/her family, but in the event of a divorce, you certainly don’t want to be in a position where an ownership interest in your business ends up in the ex-spouse’s hands and just the thought of having to buy back shares in your own company makes you sick!
The problem in a divorce is that shares in a company are ‘matrimonial property’ and the value of those shares will need to be addressed in any divorce situation as 50% of the gain in the value of those shares while your child is married is attributed to the ex-spouse. The problem becomes more complex if the family business is a private company as no one really knows what the exact value of the company is and your ex-son/daughter-in-law thinks his/her interest in your company is far greater than you do.
But what can you do to control this?
Lawyers will tell you that you need to have a Pre-Nuptial Agreement, a Family Trust, and/or a Unanimous Shareholders Agreement to address the ownership of the. Each of these has its issues and none of them eliminate the potential problem.
Pre-Nuptial Agreements are probably the most effective in addressing any future divorce provided that they have been properly prepared, the assets and interests of each other are fully disclosed, each party has obtained a certificate of independent legal advice, and the signing of the agreement is not coerced (including the need to sign it the day before the wedding). While the concept of the Pre-Nuptial Agreement is fairly straightforward, are you prepared to force your son/daughter to get one before he/she gets married? Is your child prepared to have the conversation with his/her love to say “I love you and will spend the rest of my life with you once you sign on the dotted line”? The issue gets even more difficult if you decide that all of your children have to get one and one or more of them is already married and needs to get a Post-Nuptial Agreement.
Family Trusts can be effective as the trustees have discretionary powers to determine who is and isn’t entitled to receive benefits under the trust. A trust can be developed where spouses are not entitled receive any benefits, but how does that work if your child should die and you feel the need to provide support in the raising of your grandchildren (any they are not old enough to receive the support directly)? If a spouse has been included, and benefits were distributed to that spouse during the marriage, having that interest removed on a divorce would be very difficult.
Unanimous Shareholders Agreements
A Unanimous Shareholders Agreement can be drafted to address divorce issues. If properly prepared, the divorce would trigger an obligation of a party to sell his/her interests in the company. Trying to impose terms in such an agreement without discussion among the parties will likely result in everyone incurring significant legal fees in the resolving the matrimonial property interest of the ex-spouse.
These are just a few of the issues to be addressed in any family enterprise succession plan and all of these issues need to be addressed by way of meaningful conversations with everyone that has a vested interest in the business.
If you are ready to have these discussions with your family, you may want to retain the services of a FAMILY ENTERPRISE ADVISOR™ to assist you and your family in formalizing a succession plan that everyone is prepared to adopt. FEA’s have the knowledge and training to address many of these issues and have a network of other professionals that can address issues that are not within their own professional discipline.
For more information about FEA’s, or to find a FEA to work with your family, go to https://family-enterprise-xchange.com.
If you have a question or issue that you would like to read about in future columns, please feel free to email me at firstname.lastname@example.org. If you want to revisit past columns, they are all online at www.yourfamilybusiness.ca.
Until next time.