Just like in a marriage, no one at the outset of a closely held company expects things to go south and end in divorce. But just like in a marriage, the best time to address what will happen if things do not go as hoped is at the outset when everyone is excited and working together. Instead of a pre-nuptial agreement, shareholders in a closely held company will want to include provisions regarding separation in a written buy-sell agreement (sometimes called a shareholder agreement, member control agreement, etc.).
A good reason to plan for a separation in advance is that in business divorces where no agreement on separation exists, Minnesota courts look to the reasonable expectations of the shareholders. In one landmark Minnesota case, the court awarded a minority shareholder both the value of his shares in the company and his lost wages for the remainder of his working life, as the court determined that those were the reasonable expectations of the shareholders in forming the company. To avoid a court determining what the original reasonable expectations of the shareholders were years later, shareholders should strive to eliminate confusion by spelling out the reasonable and agreed-upon expectations in a buy-sell agreement.
Read the article by Josh Feneis which appeared in the May/June 2019 Upsize Minnesota Magazine. The article discusses:
- Terms to include in buy-sell agreement: deadlock, valuation and dispute resolution.
- Steps to take when divorce is forthcoming: talk to an experienced commercial litigation attorney, avoid unnecessary communications, preserve documents, attorney fees.
For more information, contact Josh Feneis at jfeneis@lommen.com or 612.336.9353.