The 4 D's For Business, Part I, Divorce and Death - JMBM Corporate Lawyer Bill Capps
Published on Nov 20, 2015
Jeffer Mangels Butler & Mitchell LLP corporate attorney, Bill Capps, launches a series of videos to help business people think about legal issues. In the 4 D’s – Part I, Capps uses real-life stories to illustrate how divorce and death should be considered when creating business agreements of all kinds. For Part II on Disagreements and Disability, click here.
Thanks for tuning in to the first of our videos designed to help business people think about legal issues. I say think about issues because the lawyer's job–my job–is to worry about the issues! I'm Bill Capps, and I serve as chairman of our law firm's Corporate Department. For more than 30 years, I have helped businesses to achieve their goals and solve their problems.
Over the years, we have found it useful to talk about the four D's: divorce, death, disagreement and disability. This is a handy way of reminding business people about some of the most crucial issues they face in their relationships with other business people. So, you will find these concepts useful not only in agreements among shareholders in corporations, but also in agreements among members in limited liability companies (so called operating agreements)–and in fact in other situations as well, such as employment or consulting agreements. Let me tell a couple of true stories to illustrate the point. The names have been changed, of course.
How Divorce Can Affect Your Business – Joe and Henry start a business in the form of a limited liability company. They each own half of the business. They have a very complex operating agreement (fortunately, drafted by one of my competitors). It has provisions for capital contributions, for making management decisions, and for transfer restrictions to keep the business out of the hands of strangers. The agreement even contains provisions which try to keep the business in the hands of Joe and Henry in the event they're divorced from their spouses. The business isn't doing well and additional money is needed to finance the losses. Meanwhile, Henry's wife commences divorce proceedings. When Henry and Joe try to obtain additional money to fund the business, Henry's wife (through her divorce lawyer) objects. Basically, the wife's divorce lawyer says–in so many words, "This is a bad investment, and you cannot use community property funds to save it."
The one thing the operating agreement forgot to do was to figure out how to keep a divorcing spouse from spoiling the business. Because Henry and Joe were friends, the operating agreement naturally requires unanimity for action, but didn't show how to resolve a stalemate if 50 percent of the ownership wanted to borrow money but the remaining 50 percent was not unanimous and could not act. Eventually, in order to get his spouse's consent to a further financing of the business, Henry had to capitulate on other family law issues in the divorce. Basically, the business was held hostage to resolution of the family law issues. The business was recently sold and Henry and Joe took their losses. How Death Can Affect Your Business – Another story helps illustrate the importance of addressing the 4 D's at the beginning of a business relationship–the possible death of a business owner. Brothers Tom and Jerry own an engineering firm with their dad. Of course, everyone thinks dad will die first. Instead, Jerry dies first. Jerry's wife is unpopular with the family and not a good business partner. The shareholders' agreement allows Tom and Dad to buy out Jerry's wife. Jerry's wife, however, doesn't believe the price is high enough. Fortunately, the court enforces the price agreed to in the shareholders' agreement and Tom and Dad go on to build a good business without having to deal with Jerry's widow. In this case, the shareholders agreement did exactly what it was supposed to do–namely, protect the other shareholders and the business against a shareholder who was difficult to deal with.
Please tune in to hear the second of our videos on disagreements and disability.