Complex Divorce: Dividing the Marriage and the Business

November 22, 2017 | Blog, Business Valuation, Complex Financial Issues, Divorce, Executive Compensation

Icon for author Heather Trostle Smith Heather Trostle Smith

Business attorneys will tell you nothing is more complex than dealing with the dissolution of business partnership. They even refer to it as a “business divorce.”  However, there may be something more complicated than a “business divorce,” and that is an actual divorce between spouses who jointly own a closely held business.

Almost one-third of the 2.6 million companies authorized to do business in Pennsylvania are small businesses of fewer than 100 employees. These small businesses can be owned by a husband and wife, who may derive their livelihood from it. When you consider the more than 33,000 divorces that were granted in Pennsylvania in 2016, chances are more than a few of the husbands and wives were not only spouses, but also business partners. In these cases, the business and life partners now need experienced Pittsburgh divorce lawyers not just business lawyers.

At the Intersection of Divorce and Business

While both the husband and the wife may be shareholders in the company, their respective percentage of share may not be equal, or life circumstances may have dictated one is not as active in the day-to-day operations of the business. When a divorce happens, that minority shareholder or less active spouse may be vulnerable to being “shut out” of decision making, information or even cash flow.

In addition to the remedies provided by the Divorce Code, the Pennsylvania Business Corporation Law provides protection for a disenfranchised shareholder, in our case a disenfranchised spouse, in much more specific manners. Codified in Title 15 of the Statutes of Pennsylvania, the BCL contains specific rules governing the conduct, rights and duties of officers, directors and shareholders, and focuses on two major responsibilities owed to shareholders: 1) the duty of care; and 2) the duty of loyalty.

Majority shareholders have a fiduciary duty to act for the benefit of the corporation in contrast to their own individual benefit — a concept that can get lost if one spouse is using the company as his or her own personal bank account. A majority shareholder that acts to his or her own benefit to the oppression of the minority shareholder(s) may be liable for damages.

These actions can include:

  • Refusal to pay dividends where there are profits and reasonable cash flow, for instance in an attempt to “starve out” the disenfranchised spouse.
  • Appropriation of business assets such as vehicles owned by the company but provided to the shareholders for personal use.
  • Appropriation of business opportunities, for example, to a new entity created and solely controlled by the shareholder in power.
  • Payment of unreasonable salaries to the shareholder him/herself, or in an all to frequent scenario the shareholder’s new paramour.
  • The withholding of information despite the disenfranchised shareholder’s request for the same.

With specific regard to information, the BCL provides every shareholder with the right to annual financial statements including income statements and balance sheets. If an independent, third-party analysis is done in the form of a compilation, review or audit, that report is also to be published once the accountant has completed the work. 15 Pa.C.S. §1554.  The comment to the section states that failure to comply is clear evidence of conduct sanctionable under 42 Pa.C.S. §2503(7).

There is also the right to examine the books and records of the corporation. This includes stock registers, bylaws and minute books. The right is to be exercised at the place where the records are kept during normal business hours and includes the right to have copies made.  15 Pa.C.S. §1508.  Failure to comply with a written request within five days allows for the shareholder seeking documents to file a petition directed to the court to order the inspection. The burden falls on the corporation (i.e. the controlling shareholder) to show improper purpose in proffering the request.

With the additional weapons the BCL provides being included in the arsenal of the disenfranchised spouse, additional pressure can be placed on the controlling shareholder spouse and/or other shareholders. That pressure can very well lead to resolution of the divorce case so everyone can get back to business.

Divorces can become very complex very quickly. When a closely held business is involved, those ramifications promptly multiply. You need the experience of a Pittsburgh divorce attorney adept at business valuation and aware of specific business-related issues, particularly with complex, high net worth cases. If you are a shareholder in a closely held business with your spouse, contact the Pittsburgh divorce attorneys at Pollock Begg Komar Glasser & Vertz LLC at (412) 471-9000 or fill out our online contact form so you can schedule a time to discuss your situation.

About the Author

Tapped to present educational workshops and lectures both within the legal industry and other outside business associations, Heather Trostle Smith is a senior associate attorney at Pollock Begg Komar Glasser & Vertz LLC. Her practice spans multifaceted family law issues including complex financial circumstances and high net worth individuals.

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