Protect a business from marital breakdown

Marital breakdown can destroy a business, but it needn’t be this way. With the right planning, your client’s business can survive a failed marriage.

Family law

Provincial law determines how assets are divided when a married couple separates. For the most part, assets acquired during the marriage are seen as communal property. In most provinces, these include the home, vehicles and even the business.

There are exceptions. For instance, if one spouse receives an inheritance, the money or asset inherited is hers to keep. However, if that money is used to pay down the couple’s mortgage or otherwise intermingled with joint assets, it usually becomes part of the common property.

Read: Case Study: Co-owners’ divorce leaves business in limbo

Family law aims to ensure spouses end up with equal shares of family assets after separation. The spouse with the higher net worth will make an equalization payment to the other spouse.

It’s more complicated for common-law spouses. In Ontario, New Brunswick, Newfoundland and Labrador, Quebec, Alberta, and the Yukon, common-law partners don’t equalize assets upon marital breakdown. Rather, each spouse leaves the relationship with the assets registered in his or her name.

In B.C., Manitoba, Saskatchewan, Nova Scotia, PEI, Northwest Territories and Nunavut, common-law couples have some of the same rules as married couples, assuming they’ve lived together a certain number of years. In B.C., for example, the Family Law Act considers common-law couples that have lived together for two years to have the same rights as married couples. Laws change and vary, advise your client on getting the most up-to-date information.

In provinces where common-law spouses don’t have an automatic right to equalization, the only recourse for the non-title-holding spouse is to establish that he or she made some kind of contribution to the other spouse’s assets. Making such claims is complicated and costly.

In marriage and common-law scenarios, a business will have to be valued and in some cases divided on separation. In extreme cases, an administrator will be appointed by the court to oversee the business, or shares will be given to the non-owning spouse if they are owed a payment. Sometimes a payment obligation toward the non-owner that needs to be satisfied through the business will create irreparable harm to the business’ ability to meet expenses. This can seriously impact relationships with suppliers, clients and employees, and thus the business’ overall viability.

To avoid such outcomes, ensure that when a shareholder enters into a marital relationship, there’s a domestic agreement in place that governs what will happen to the business in the event the relationship breaks down. This is easier said than done, however, especially if the business is formed when the shareholder is already married.

Domestic and shareholders agreements

A domestic agreement (also known as a marriage contract, pre-nup, or post-nup) allows spouses to make private arrangements outside the framework of provincial family law to regulate how assets should be divided in the event of marital breakdown. These agreements can be entered into any time before or during a marriage or common-law relationship.

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If the business is formed during a marriage or common-law relationship, and both spouses play a role in the business, the spouses should enter into a shareholders agreement. It would, among other things, define the process by which a spouse would exit the business, whether due to marital breakdown or other cause. For example, a shareholders’ agreement can require divorcing shareholders to sell their shares to the corporation or to the other shareholders.

The goal of both domestic and shareholders agreements is to keep the business intact during a break-up and avoid lengthy, complicated and expensive court battles. By defining expectations when things are harmonious, owners have a better chance of shielding the business from the devastating impact of acrimonious battles when or if things turn sour.

When trouble starts

Couples whose marriages are starting to fray should meet with a counselor. It can bring them back together, or at least help them separate in a civilized way.

If this doesn’t work, the couple needs to sort out how the separation will work. There are six legal processes available to separating couples:

• Spouse-to-spouse negotiation: Spouses discuss and agree together without lawyers.
• Collaborative lawyer-to-lawyer negotiation: A formalized no-court separation process where lawyers help their clients negotiate, using advanced negotiation techniques.
• Mediation: The couple meets alone with a third party, the mediator, who facilitates negotiations. Lawyers can be present when the issues are more complex.
• Arbitration: This is akin to hiring your own private judge. The arbitrator will make final, binding decisions.
• Traditional lawyer-to-lawyer negotiation: This is when lawyers help to negotiate an agreement, but unlike collaborative negotiations, there is no structure or formality to the process and lawyers can and do use adversarial negotiation tactics.
• Court: If a divorce goes to court, everything, including sensitive business information, is made public. It can also be an expensive, protracted process.

Couples should view court as a last resort, especially when there’s a business involved. If they go to court, they each lose control over the outcome and all the details about the business become public. Additionally, judges have the power to make decisions that can seriously impact a business.

Overall, the best option when there is a business involved is collaborative lawyer-to-lawyer negotiation. The collaborative divorce involves interest-based negotiations, following protocols developed by Harvard researchers. This private, out-of-court process allows separating spouses to constructively resolve their personal, business and financial affairs. Collaborative divorces tend to be more cooperative and less adversarial than traditional divorce.

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Nathalie Boutet

Tax & Estate

Nathalie Boutet is a family lawyer, mediator and certified Family Enterprise Advisor™ specializing in high-net-worth families and business owners. She can be reached at nboutet@boutetfamilylaw.com.