Protecting Your Business From Unwanted Owners and Shareholders

When you go into business, you generally can choose who you want to be in business with. You can choose your partners, or your managing members if you’re an LLC, or who you want to sell your shares to if you’re not publicly traded.

When Someone Loses Control of Your Business

But you do need to account for the situations where you may not get to choose because somebody’s interest in the business has been lost because of circumstances out of their control. These are usually times when interest in a business is transferred by operation of law.

Imagine, for example, these kinds of situations:

• A partner loses his financial or ownership interest in your partnership in a divorce to that partner’s now ex husband or wife
• A shareholder goes bankrupt, and his or her shares in your company now have transferred to the bankruptcy trustee, or a creditor
• A managing member of an LLC dies, and thus his or her interest now transfers to his or her heirs

In these situations, and others like it, you may find yourself in business with someone who you don’t know, don’t want to be in business with, or with someone who knows nothing about your business.

What Can You Do?

You can’t do anything about these automatic transfers when they happen. What you can do now is alter or amend your corporate documents so that you’re prepared for these events when and if they happen.

For example, you are allowed in your corporate documents to prohibit an ex spouse from owning any part of a business or shares in a business. As an option, the company can repurchase the shares from the now ex-spouse. Valuation becomes an issue but your shareholders’ agreement can spell out a formula to determine the fair market value of shares or at least a methodology that will be used to value the shares.

In some cases, you can say that if the shares transfer in one of the above ways, the new shareholder will get the benefits of shares financially—that is, to receive dividends—but will not have any managerial or decision making or voting powers.

Using Spousal Consents

You also can have spousal consents signed. These of course must be signed before the person takes the ownership interest in the business.

For example, the company can have someone interested in purchasing shares, have their spouse sign away rights to receive shares in the event of divorce or death, as a condition to selling the shares to the person in the first place.

Be aware that these spousal consents could conflict with the shareholder’s or owner’s prenuptial agreements. As such, anybody who is signing an agreement which waives his or her spouse’s rights to own the shares should consult with their family law attorney first.

Spousal Co-Owners

It does happen that a husband and wife both want to own an interest in your business. Be careful—if their marriage or relationship goes sour, you could have owners or shareholders who are at odds with each other, and more concerned with being uncooperative if the divorce turns contentious, regardless of what may or may not be good for the company.

Call the West Palm Beach commercial litigation lawyers at Pike & Lustig today for help drafting your corporate documents in a way that best protects your business.

Source:

thefbcg.com/resource/shareholder-agreements-parting-ways-part-1/