April 16, 2019 Articles

The Business Owner and the Premarital Agreement

Disclosure regarding a closely held business, bulletproofing the agreement, and protecting exclusive rights to the business.

By Sahmra A. Stevenson

Premarital agreements come in all shapes and sizes. A well-drafted premarital agreement will consider the particular needs and interests of the parties it is intended to protect. For a business owner considering the terms of such an agreement, there are a few issues that deserve particular attention and that counsel for the business owner must keep in mind during the negotiating and drafting phases of the agreement: (1) providing business valuations that will withstand scrutiny in the event of a challenge; (2) preserving confidential information about the business during the negotiations; (3) limiting access to business documents and information in the event of a future dispute; and (4) retaining exclusive rights of ownership of the business.

Disclosure Regarding a Closely Held Business

The value of a closely held business may not be easy to identify, and there is no obligation for one party or the other to obtain a formal appraisal for the purposes of negotiating or reaching an agreement. 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. (When the value is stated as book value, it is important to include, as a part of the disclosure, an acknowledgement that the value may be higher. See Head v. Head, 477 A.2d 282 (Md. Ct. Spec. App. 1984).

A business owner who assumes that a party’s knowledge of the existence of a business is tantamount to an understanding of its value is making an avoidable mistake. There are a variety of options for disclosure that can avoid confusion or a future challenge on the grounds of a failure to disclose. For example, a business owner can provide gross and net revenues of the business, ownership interests and percentages, salary and income statements, tax returns, cash flow statements, or profit and loss statements. The bottom line is that when accessing the value of a closely held business, a business owner who fails to provide meaningful disclosure of known data does so at his or her own risk.

Counsel for a business owner can best serve his or her client by taking the time to become familiar with the business, its organization, management, and relationships with relevant third parties like certified public accountants and financial advisors. As a part of getting to know his or her client, counsel should inquire as to the existence of past appraisals for the business or any major assets being held by the business.

If prior appraisals have been obtained, counsel should have a healthy understanding of the purpose of the appraisals and their results. Other recommended inquiries include questions about whether the business has received any purchase offers, whether the business has plans for public offering, or whether the business owner has made a personal statement of net worth. Information gathered during that process is helpful in developing a plan for the statement of value. Further, the existence of contemporaneous documents and information will be discoverable in the event of future litigation. The disclosure for a premarital agreement should not conflict with other statements of value that have potentially been made close in time.

Waiver of financial disclosure. Parties may waive financial disclosures by agreement. A waiver should include an acknowledgement that the recipient had the opportunity to ask for more information or documents and declined, that he or she is satisfied with the information received, and that he or she received enough relevant information to make an informed decision prior to signing on the dotted line.

Addressing privacy concerns and the disclosure of financial data.  Disclosures regarding a business will often include information that the owner would prefer to keep confidential from current and future family members, or from the public at large in the event of future litigation between the parties. Concerns such as these can be addressed and prevented by counsel in advance. The following are a few optional approaches:

  1. The agreement may disclose each party’s net worth in the aggregate without an itemized list of assets.
  2. Business and financial records may be provided for inspection but not retention by the parties (or counsel). 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 his or her examination of them.
  3. The agreement should include a provision requiring both parties to maintain confidentiality of 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 order.
  4. Counsel for a business owner might consider requiring a pre-execution/negotiation confidentiality (or nondisclosure) agreement prior to making any disclosures.

Bulletproofing the Agreement

The same legal standards for validity apply 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 also in experience, education, and bargaining ability—a business owner can be opening himself or herself up to claims of duress or undue influence. The following steps and actions can help prevent such allegations:

  1. The party seeking the agreement should make his or her requests well in advance of the wedding date.
  2. The party seeking the agreement should encourage the other party to obtain counsel. Advisements should be put in writing and should be made throughout the negotiating and drafting process, especially where the receiving party fails to act or refuses representation outright.
  3. Ideally, a business owner should take all necessary steps to make an adequate written financial disclosure to the other party.

Protecting Exclusive Rights to the Business

Parties to a premarital agreement can accept whatever substantive terms they can agree upon with regard to the disposition of property at divorce or death and with regard to post-divorce spousal support, unless the agreement is deemed unconscionable at execution. So long as an agreement is not unconscionable, there is nothing that prevents parties from agreeing to terms and entering into an agreement that permits one party, or both parties, to retain exclusive rights and interests in an existing business, or one acquired in the future. It is extremely difficult to prove unconscionability at execution. A challenger must prove both substantive unconscionability (extremely unfair terms) and procedural unconscionability (an extremely unfair process).

Conclusion

A business owner is best served by counsel who pays particular attention to ensuring as fair a process between the parties as possible, at the time of formation. Counsel should take adequate steps to document and record his or her demonstrated efforts in case of a future challenge. Agreement terms that take into account the potential for economic disparity and instead include provisions that create economic security for both parties are harder to challenge as unconscionable.

Sahmra A. Stevenson is the founder of S.A. Stevenson Law Offices, with offices in Greenbelt and Columbia, Maryland.


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