Can Ex-Spouses Keep Running a Business Together After a Divorce?

Unsplash [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayDivorce typically requires a near-total reorganization of one’s home, family, and personal life. In some cases, it affects the workplace too, such as when spouses are also business partners. A recent court order effectively “broke up” a pair of business owners, who had also once been a romantic couple, after finding that their personal animosity made running the business together impossible. Not all instances of businesses split up by divorce are quite so dramatic. Sometimes ex-spouses are able to continue running a business together, but New York’s business and family laws provide means for divorcing couples to complete the divorce with minimal adverse impact on the business.

In August 2015, a Delaware Court of Chancery judge issued a 106-page order in In re Shawe & Elting LLC, et al., appointing a custodian to effect the sale of a profitable business corporation. The two parties to the case, EE and PS, owned 50 and 49 percent of the stock in the company, respectively, although the court treated them as having equal shares and voting rights. They reportedly started the business in a business school dorm room in 1992. They grew it into a global provider of translation services, with millions in annual revenue.

The two became engaged in 1996, according to the court, but EE broke it off in 1997. Although the business became quite profitable over the years, the court found that the relationship between EE and PS, who essentially owned the company 50/50, had deteriorated to a point of “complete dysfunction,” resulting in “irretrievable deadlocks over significant matters” that threatened “irreparable injury” to the business. It granted EE’s motion to appoint a custodian, as permitted by Delaware law in cases of deadlocks, to sell the corporation.

Although this case applies Delaware law and never specifically involved a divorce, it is relevant to divorces between business partners in New York, since it demonstrates numerous situations divorcing parties should strive to avoid. Spouses and couples who want to go into business together can protect themselves and their future business in the event of relationship problems. Couples are often wise to enter into prenuptial agreements, and business partners are similarly wise to plan for potential pitfalls in their business relationship. A carefully drafted prenuptial agreement can take business matters into account.

Even if a couple does not include business planning in a prenuptial agreement, they have numerous options short of “irretrievable deadlock” for dealing with their business relationship in a divorce. The business, or each spouse’s equity in the business, is part of the marital property. Even if the couple started the business before getting married, marital claims may still exist on each spouse’s equity. A valuation of the business and each spouse’s equity is critical to determining an equitable division of the assets. Options from that point include:

– Continued co-ownership of the business;
– Sale of one spouse’s equity to the other spouse, also known as a “buyout”; or
– Sale of the business to a third party, and division of the net proceeds.

New York divorce law requires an equitable distribution of marital assets. This process can be particularly troublesome for couples who have amassed a substantial amount of wealth. If you are considering or are already involved in a New York divorce proceeding, you should consult with an experienced and knowledgeable family law attorney. Ingrid Gherman has represented people in New York City in divorces and other family law matters for the past three decades. Contact us online or at (212) 941-0767 today to schedule a confidential consultation.

More Blog Posts:

New York Appellate Court Vacates Part of Divorce Judgment, Finding Issues of Property Distribution Remained in Dispute, New York Divorce Attorney Blog, September 2, 2015

New York Appellate Court Considers Whether a Marital Residence, Purchased Before the Marriage, Can Become Marital Property, New York Divorce Attorney Blog, August 5, 2015

New York City Feels Impact of Certain Multi-Billion-Dollar Divorce Cases Across International Borders, New York Divorce Attorney Blog, June 22, 2015

Photo credit: Unsplash [Public domain, CC0 1.0], via Pixabay.