The dreaded prenuptial agreement: It’s the family’s business | Phil Kriszenfeld
Tuesday, January 21, 2020 @ 3:09 PM | By Phil Kriszenfeld
Actually, it should be brought up during family meetings when properly facilitated. Ideally, it should be brought up before the ring is even purchased.
I spoke at the Family Dispute Resolution Institute of Ontario’s annual convention in late 2019 and my presentation topic was focused on the importance of a solid shareholder agreement within a family business, especially when the next generation transitions into an ownership role. The most obvious question that comes up is, Why? When a family business is achieving an increased level of success such that the next generation becomes involved in the ownership, it is vital that the integrity, value and ownership stay within the family.
These transitions happen for many reasons. They include creating a succession plan for the business to carry on for generations to come, estate planning for the older generations and the dreaded tax planning.
Shareholder agreements contain many obvious sections and as I am not a lawyer, I will not act as though I know what they all are and what they all mean. This article is about whether or not a prenuptial agreement clause should be included in a shareholder agreement.
This topic came up recently with a group of clients that included two brothers, one sister and a brother-in-law as partners. One of the brothers had gone through a very aggressive divorce. This involved “claims” against the company and himself individually.
As a result of the proceedings, there were in excess of $100,000 in both legal and forensic accounting costs to challenge every valuation and every layer of accounting, including business expenses incurred during the course of operations. Every tank of gas, parking receipt and hotel bill was assessed and challenged, resulting in an agonizing process for the company and its resources.
I brought up the discussion of including a clause to address these potential concerns in the new agreement we were working on. This client was very nervous about having that clause in the agreement. He was concerned about the potential backlash that would result by merely suggesting a prenuptial clause to a future spouse.
The conflict among the shareholders started to escalate over this one clause and we had many uncomfortable discussions surrounding it. It even got to the point where another shareholder was unwilling to sign the new agreement unless the clause was included. Things appeared to be falling apart before they could even begin.
As a mediator and family enterprise adviser sometimes these uncomfortable discussions need to play out and that’s what I chose to do. When there was a moment of silence, I simply asked one question to the brother who recently went through his divorce: “Do you want to have to go through that again and put your family through this?” The discomfort of the divorce was less than the fear of asking a future spouse for a prenuptial agreement. The other shareholders had been astonished watching their brother and partner go “through the gates of hell,” as they described the recent divorce.
I am not a fan of “punitive” measures put into shareholder agreements but it was time to look at options that would impact the future. I suggested a clause that forces the shareholder who was planning to get married to tender all of his shares over a five-year period (and at a proper valued number) should he get married with a prenuptial agreement that was satisfactory to the corporation, its legal counsel and its shareholders.
As you can imagine it wasn’t received well by the divorced shareholder. Things started to get heated but I asked all the shareholders to pause for a minute and reflect. I presented the notion of how much easier it would be to ask for a prenuptial agreement now than wishing they had one afterwards.
Facing their bewildered looks, I explained it clearly. “If you are going to get married again, isn’t it easier to say to your future spouse that the prenuptial is mandatory, otherwise you’ll have to forfeit your shares of the company?” It sounded harsh but it applies equally to the other shareholders. If they got divorced and wanted to remarry, they would have to have a prenuptial agreement as well.
Blame the agreement and protect the company and your partners. In many ways it is a true win-win in the long term.
Phil Kriszenfeld is a family business adviser and mediator with Transitions Mediation and Consulting Group, which focuses on improving communication for family enterprises in transition and mentoring the next generation to determine optimal outcome for the family and the family business.
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