Owners and founders of closely held businesses often involve married couples. Therefore, a consideration that all owners of these businesses should consider is the need for premarital agreements or “prenups,” which come in all shapes and sizes under U.S. law. A well drafted premarital agreement will take into account the particular needs and interests of the parties it is intended to protect. For business owners considering a prenup, there are a few areas of concern that deserve particular attention, issues that their counsel have a responsibility to keep in mind during the negotiating and drafting phases; particularly, the following:
- Providing adequate financial disclosures regarding the value of the company and its business to counter any potential legal challenge that may be brought later;
- Protecting any confidential information to be disclosed during the negotiations;
- Restricting spouses’s access to the company’s material business documents in the event of a future legal dispute; and
- Trying to ensure that the business owners retain exclusive rights to the ownership and management of the company in order to provide for the succession of the
- Disclosure Regarding the Value of a Closely Held Business
The value of a closely held company (and its business) may not be easy to determine, and under Maryland law there is no obligation for a spouse to obtain a formal appraisal for purposes of negotiating or entering into a prenup. Generally, a good faith statement of value stated as a range or estimate of value is adequate where an exact value is not readily ascertainable; provided, however, that when the value is stated as book value the premarital agreement should include an acknowledgement that the value may be higher. See Head v Head, 477 A.2d 282 (Md. App. 1984).
A business owner who assumes that because his or her spouse has knowledge of the business means that his or her spouse also knows the value of the company/business is making a regrettable, and an avoidable, mistake. There are a variety of options available to provide adequate disclosure in order to avoid any confusion or future legal challenge based on inadequate disclosure. For example, a business owner can provide in the prenup information such as gross and net revenue of the business, ownership interests and percentages, compensation paid to insiders and others in the business, and financial statements, such as income statements or tax returns, cash flow statements and profit-and-loss statements to support his or her spouse’s knowledge, whether constructive or actual, at the time the prenup was executed. The bottom line is that when accessing the value of a closely held business for purposes of a premarital agreement, the business owner who fails to provide meaningful and adequate disclosure of all known data and material facts does so at his or her own peril, and may jeopardize the validity of the prenup itself.
Counsel drafting a premarital agreement for a business owner can best serve his or her client by taking the time to get familiarized with that client’s business and the business organization, management,
and relationships with relevant third-parties like CPAs and financial advisors. As a part of getting to know its client, counsel should also inquire as to the existence of any past appraisals conducted on the company and its business or any of the major assets used in the company’s business.
If prior appraisals have been obtained, counsel should have a full understanding of those appraisals and their results. Other recommended inquiries include whether the business has received any purchase offers, whether there are any plans to conduct a public offering or other material reorganization, or whether the controlling business owner has made a personal statement of net worth. Information gathered during that process will be helpful in developing a plan for the statement of the company’s value. Furthermore, counsel needs to remain cognizant that the existence of contemporaneous documents and information will be discoverable in the event of future litigation. Accordingly, the valuation, conclusions and disclosures in the premarital agreement should be reasonably consistent, and not materially conflict, with other valuations or statements of value conducted around the same time on the company and its business.
1.Waiver of Financial Disclosure
Parties may waive financial disclosures by agreement. And a waiver should include an acknowledgement that the recipient had the opportunity to ask for more information or documents and that the recipient either declined or acknowledged that he or she was satisfied with the information received from the company and her spouse, and that he or she received sufficient relevant information to make an informed decision prior to signing on the dotted line.
2. Addressing Privacy Concerns and the Disclosure of Financial Data
Disclosures regarding a business can often include information that the owner would prefer be kept confidential from current and/or future family members, or from the public at-large in the event of future litigation. Concerns such as these can be addressed in advance, and possibly prevented, by utilizing a few approaches, such as the following:
- Disclosing each party’s net worth in the aggregate without an itemized list of
- Providing Business and financial records for inspection but not allowing the other party (or counsel) to retain any copies. In these circumstances, the agreement should identify each of the documents provided for review and the receiving party should be required to sign a waiver acknowledging their examination and
- Including a provision requiring both parties to maintain confidentiality of all financial information received from the other party, and for the disclosure schedule to be submitted to a court in any future dispute under seal and with a protective
- Counsel for a business owner should strongly consider requiring the execution of a confidentiality (or non-disclosure) agreement prior to making any material
3. Bulletproofing the Agreement
The same legal standards that apply for validity to a premarital agreement executed by a business owner as by any other contracting party. A business owner however must take into consideration his or her unique vulnerabilities when it comes to potential future challenges. When there is a big disparity between the parties, not only in wealth, but in experience, education and bargaining ability, a business
owner can be opening the door for claims of duress or undue influence. The following steps and actions can help prevent such allegations:
- The party seeking to establish the prenup should make his or her requests well in advance of the intended date the agreement is to be executed;
- The party seeking the prenup should encourage the other party to obtain counsel. Appropriate representations and acknowledgements should be put in writing and made throughout the negotiating and drafting process, especially where the receiving party fails to act or refuses outright to obtain any legal representation;
- Ideally, the business owner should make an adequate written financial disclosure to his or her
4. Protecting Exclusive Rights to the Business
Parties to a premarital agreement can agree in advance to whatever substantive terms they desire with respect to the disposition of property upon divorce unless the agreement is deemed to be unconscionable at the time of execution. So long as an agreement is not deemed to be unconscionable, then nothing should prevent parties from agreeing to terms, and entering into an agreement, that permits one party or the other, or both parties, to retain exclusive rights and interests in an existing business, or even to any business that is acquired in the future. It is extremely difficult to prove unconscionability at execution, however, because under Maryland law the challenger must prove both substantive unconscionability (extremely unfair terms) and procedural unconscionability (an extremely unfair process).
A business owner will be best served by engaging counsel who tries to balance everyone’s interests and make the process between the parties (i.e., separation and divorce, if it comes to that) as fair as possible at the time the agreement is executed. Counsel should take adequate steps to document and record the efforts that were taken in this regard in case of any future legal challenge. Finally, the terms of a premarital agreement should take into account any economic disparity (potential or real) between the parties and include provisions that create economic security for both sides, making it harder to bring later any challenge alleging that the agreement is unconscionable. Simply because there is a disparity between the parties may not be sufficient in itself. An agreement that perpetuates an existing disparity is not unconscionable. It is imperative that a party to a prenup engage appropriate legal counsel to ensure the parties’ arrangement and premarital agreement is tailored to the needs and wants, and protection, of that party.
By, Sahmra A. Stevenson, Esq.
S.A. Stevenson Law Offices, LLC