Divorce Provision in Shareholder Agreement: What You Need to Know
When starting a business with partners, it`s important to have a shareholder agreement in place. This legally binding document outlines the rights and responsibilities of each shareholder, as well as how the company will be managed and how profits will be distributed.
One aspect of a shareholder agreement that is often overlooked is the divorce provision. This provision outlines what happens to a shareholder`s ownership in the company in the event of a divorce.
Why is a Divorce Provision Important?
The divorce provision is essential for protecting the business in the event of a shareholder`s divorce. Without a divorce provision, the spouse of the shareholder has the potential to become a co-owner of the business, which could lead to conflict and instability.
Additionally, the divorce provision can prevent the forced sale of the shareholder`s ownership in the event of a divorce. This can protect the remaining shareholders from having an unwanted third-party partner.
What Should a Divorce Provision Include?
A divorce provision should outline a clear process for handling a shareholder`s divorce. The following elements should be included:
1. Definition of “Marital Property”: The shareholder agreement should define what constitutes marital property. This will help determine which assets are subject to division in the event of a divorce.
2. Buyout Option: The provision should include an option for the company or other shareholders to buy out the divorcing shareholder`s ownership. This can prevent the spouse from becoming a co-owner of the business.
3. Valuation Method: The shareholder agreement should outline how the value of the company will be determined in the event of a buyout. This can prevent disputes over the value of the company and ensure a fair buyout price.
4. Timeframe: The provision should include a timeframe for the divorcing shareholder to sell their ownership or for the company/other shareholders to buy it out. This can prevent a prolonged period of uncertainty for the business.
5. Confidentiality: The divorce provision should include a confidentiality clause to protect the company`s sensitive information from being disclosed during divorce proceedings.
Conclusion
A divorce provision is a crucial element of a shareholder agreement. It can protect the business from instability and conflict in the event of a shareholder`s divorce. When drafting a shareholder agreement, it`s important to work with an experienced attorney to ensure that all necessary provisions are included and that they comply with state laws.