Yesterday’s Divorce Won’t Do Today - Complex mix personal and professional require creative solutions, As Seen in Metropolitan Corporate Counsel (Jan 2017)
Jan L. Bernstein, Esq.
Divorce is never easy. That’s especially the case when division of businesses, stock options, pensions, real estate, and other high-net-worth assets are involved. Investing the time and money with a lawyer experienced in handling these issues is necessary to protect your rights, ensure that you receive that to which you are entitled, and minimize the chances of litigating the nuances of your divorce agreement or judgment in the future. This article provides tips for corporate executives and business owners.
DO Consider a Prenuptial Agreement
Businesses may be or become marital assets subject to distribution along with various benefits of ownership or executive compensation including stock, deferred compensation, restricted shares, and stock options. To avoid future complications, you may want to consider negotiating a prenuptial agreement prior to marriage. If you are considering one, start the conversation early and be able to discuss why it is important to you with your soon-to-be spouse. Be mindful of the sensitive issues that could arise, and remain open to compromise. In drafting the agreement, you should analyze the many different scenarios that could arise, for example, the appreciation or transmutation of premarital assets or valuation of start-up businesses. Consider the support your spouse will provide to you, the business, and the marriage in direct and indirect ways. Find a way to value these contributions in some way, while also protecting your business and benefits.
DO Choose the Right Lawyer
It is common to consult with various attorneys prior to retaining one who will serve your best interests. Make sure you select an attorney who regularly represents high-net-worth individuals, executives and business owners. The more experience and familiarity with handling complex financial issues, the better advice and representation you will receive from your attorney. Choosing an attorney who has other important resources available to him/her (i.e., tax, corporate, real estate, trust and estate attorneys) is a significant benefit in these cases.
Another important aspect of the attorney-client relationship is communication. Make sure that you select an attorney who is responsive to your questions and is available to you. The attorney-client relationship will often last more than a few months, and you will be entrusting this person with handling confidential aspects of your personal and professional life.
In today’s business climate, with various unique ventures and executive compensation, separating and valuing business assets and perquisites should not be approached like yesterday’s divorce. The right lawyer must think outside the box, and be prepared to suggest creative solutions to the division of complex business assets.
DO Keep Organized Records
If you are an employee, you will likely need to produce copies of your tax returns, W-2s, and all proofs of income for the five years prior to the filing of the Complaint for Divorce. If you are a shareholder, partner or business owner, you may be asked to produce copies of various business records for purposes of valuation of your ownership interest and an analysis of your income and perquisites. These records may include financial statements, balance sheets and income statements with respect to any and all proprietorships, joint ventures, partnerships, realty trusts, corporations and other legal entities in which you hold a legal or equitable interest; all partnership and/or joint venture agreements to which you are a party; all declarations of trust, and minute books for all trusts, to which you are a party or beneficiary; and all corporate documents (articles of organization, by-laws and minute books) for every non-public corporation in which you have a legal or equitable interest. In short, keep documents that will demonstrate the value of business interests as of the date of marriage (if any), and during your marriage.
DO Insist on a Confidentiality Agreement
Be mindful that most financial records are discoverable, unless they are subject to the attorney-client privilege or work product. However, it is very likely that the documents demanded to be produced, or testimony sought from you, may include information that is proprietary (business secrets, formulas, client names, strategies, etc.). In light of confidential, or highly sensitive corporate or business documentation, salary information, or if one’s reputation or career could be affected if certain information was made public, a Confidentiality Agreement, or confidentiality clause in prenuptial agreements, should be used. Such an agreement permits the discovery to proceed, but designates certain defined information as confidential and only to be used in your divorce proceeding, with penalties for disclosure.
DO Obtain Proper Valuations by the Right Experts
Depending on the type of business and business assets, different experts are required for valuation purposes. For example, valuation of an on-going business requires an expert in appropriate valuation techniques and, at times, knowledge of the particular business. Has this expert valued this type of business before? Has the expert testified in court? If the business holds special assets that require independent valuation (i.e., equipment, machinery) additional experts are required. Particular types of executive compensation, for example stock options, restricted stock and deferred compensation, require different experts for valuation and taxation opinions. There are many legal issues concerning this type of compensation, and the positions taken by your lawyer will significantly affect the outcome of your settlement or trial.
Keep in mind that if you claim an asset is exempt from equitable distribution as premarital or partially premarital, or inherited or gifted to you for a third party, the burden is on you to prove your claim with evidence. Often this proof requires significant analysis and tracing of assets during your marriage.
Business and executive compensation valuations by competent experts are crucial for determining both alimony and equitable distribution. “Valuing a closely held corporation is a difficult task that is fact-sensitive and depends upon the experience of the appraiser and the completeness of the information upon which his conclusions are based because the valuation of closely held corporations is inherently fact-based and thus not an exact science.” (See Steneken v. Steneken, 183 N.J. 290, 293, 873 A.2d 501, 502 (2005.) Businesses are considered sources of income for alimony and child support purposes, as well as an asset for equitable distribution purposes. For alimony, the goal is to assist the supported spouse in achieving a lifestyle that is reasonably comparable to the one enjoyed while living with the supporting spouse during the marriage. For equitable distribution, the goal is to effect a fair and just division of marital assets.
DO Be Aware of Timing of Bonuses, Deferred Compensation and Stock Grants
Assets are subject to equitable distribution that are "attributable to the expenditure of effort by either spouse" during marriage (see Painter v. Painter, 65 N.J. 196 (1974)).
The focus is whether the nature of the asset is one that is the result of efforts put forth during the marriage by the spouses jointly (see Pascale v. Pascale, 140 N.J. 583 (1995)). Therefore, if for example a bonus was earned prior to a Complaint for Divorce being filed, it will be included as income or an asset of the marriage even if paid or received after a complaint is filed.
Arguments about when options or deferred compensation are “earned” are complicated and often contested. In Pascale, the Supreme Court of New Jersey noted that stock options awarded after the marriage had terminated (10 days later), but obtained as a result of efforts expended by the parties should be subject to equitable distribution. The Court ruled in this manner to discourage spouses from filing for divorce just before he or she expects to receive a large bonus or commission, simply to deny the spouse the benefit of an asset that was acquired through the joint efforts of the parties during the marriage.
The right attorney will know the arguments to make on both sides to determine whether assets were “acquired” during the marriage; whether marital appreciation of premarital assets, such as a closely held business, should be subject to distribution; and to what extent businesses and executive compensation acquired during the marriage should be distributed. Fractions of percentages of value can result in significantly different outcomes. The proper language in your divorce agreement will protect your rights, now and in the future.
The above referenced issues are just a snapshot of some of the issues that could arise during a complicated divorce involving executive compensation and high net worth assets. Take the time to research the right attorney who understands these issues and who will be able to protect your rights and your hard-earned assets. It will save you time and money in the end.