Operating agreement that protects the company if two members divorce each other
I'm working on an operating agreement for a three member LLC in which two of the members are married. I'd like to include some language that stipulates that in the event the marriage is terminated both of them must transfer their interest in the company to the remaining member(s). Primarily, I'd like to avoid managing a company with feuding ex-spouses.
- Will this clause supercede any other involuntary transfer provisions we already have in the OA?
- Could someone provide me an example of how to word this in the agreement. I'm having trouble locating this specific scenario?
Thanks
-
What jurisdiction? Certain states have those provisions built into the law – User60812 11 years ago
-
I would never agree to such an agreement. Why are you insisting on this? – Tim J 11 years ago
-
This is probably not a common arrangement, thus my difficulty in finding an example of the language. @TimJ: I am not asking you to agree to this agreement. I am asking my partners. Why do you presume that I am insisting? Perhaps the couple in question cares about me enough personally, and are self-aware enough to realize that in the unlikely event that they separate it will put me as well as the company in a very difficult position. – Robert 11 years ago
-
@Robert - let me put it another way then - why is divorce an event you are micromanaging with specific details and not just handling with generic exit clauses and strategy? If the shoe were on the other foot would you sign away your right to ownership for something you worked on for so long and invested money in? I am just trying to get you to see the problems this type of thing can create. I think it is good to recognize that issue and risk - but I think the solution you are tying to use is not the correct one. – Tim J 11 years ago
-
It also seems arbitrary that the "remaining" partner be given the choice to buy out the others - why aren't ALL partners given the chance to buy the others out? That seems more fair and less arbitrary. I don't think you all have thought it through. – Tim J 11 years ago
-
@TimJ - Thank you. I do see what you are trying to say, and agree in part. The other two members and I are close enough that we are trying to work out a way to ensure 1. That our company can survive in the long term and 2. that I am not put in a position to have to choose one or the other. My reasoning is perhaps a bit one sided as I am trying to protect myself in the event they divorce. Do you think a "Golden Rule" type option would be appropriate in this case? – Robert 11 years ago
-
For an equitable exit strategy if you are going to have a sale then you must give each the option to purchase the others. I am not convinced you need to have a sale clause on a divorce but whatever the trigger you should allow the highest bidder to buy the others out - it is not fair to allow only one party the option to buy the others - especially if they do not wish. I don't think you solution is the correct way to solve "the problem", but I do understand the intent and it is good to plan for these things. You are ahead of most other founders in that respect. – Tim J 11 years ago
4 Answers
In the likely event of divorce (let us be reasonable, the divorce rate is around 50%), have a Russian Roulette Clause built into the OA. Either the divorce will be amiable and they can continue working together, or one will offer to buyout the other and then the Russian Roulette Clause kicks in. You might also consider a Texas Shootout Clause. Either would solve the problem.
They are both basic deadlock provisions and fairly common to OA's. Your lawyer may even know of other ways to go about it.
Try an Option clause or agreement.
Separate Agreement, the married couple can both sign the same document. You might have to pay them some money or give them a greater share of the LLC to get them to sign the document.
Option Clause written into the LLC's Operating Agreement. Make it a general statement .....Say something along the lines of "If two LLC members are married and subsequently divorce, the LLC's remaining members have the option to purchase the divorced couple's interests in the LLC held individually and jointly, for fair market value. Option may be exercised any time between date of divorce and 60 days subsequent."
Good luck.
-
This sounds good on the surface - but the problem will be how to determine fair market value. This may require arbitration, etc. Leaving such an ambiguous term just creates more problems. – Tim J 11 years ago
-
True, Tim. people end up in court arguing over fair market value. And you are correct that if the parties can either define the fair market value now for an uncertain future date, or define the method to be used for determining fair market value, then that ambiguity will have been eliminated. – Dear Accountant 11 years ago
-
Tim - I ran out of time editing the above answer. Here's a more complete version. True, Tim. Business partners end up in civil court arguing over fair market value all the time because they didn't like their number. But waiting for a divorce to occur before determining fair value will not create more problems. Reason: Accountants calculate the fair value of partnerships and LLCs on a regular basis, with standardized procedures, defensible in a court of law. Bottom line: it's perfectly fine to wait until a divorce occurs, then determine fair value. – Dear Accountant 11 years ago
-
The issue is not when to determine FMV - but how it will be done. – Tim J 11 years ago
-
Tim - Here's a link to Financial Accounting Standard 157, which governs how a CPA would determine the fair value of Robert's company when and if his married partners divorce. http://www.fasb.org/pdf/aop_FAS157.pdf – Dear Accountant 11 years ago
Go to your local law library and look up a copy of "Cunningham on Operating Agreements." He has a section in there specifically about husband/wife operating agreements.
Financial Accounting Standard 157 (FAS 157) is the set of rules that a CPA would be required by law to use for determining the value of a company or a partnership. Like all regulations, there is room for interpretation within FAS 157, but it is considered the "authoritative source" for determining the value of a company. Robert (remember him?) can include a reference to this document in the agreement he writes up for his married partners.
Here's a link to the text of FAS 157. http://www.fasb.org/pdf/aop_FAS157.pdf
