Death, Divorce, and Disability: Involuntary Transfers and Their Impact on Corporate Entities
Corporate entities under-utilize a valuable tool that remains available to protect their shareholders, partners, owners and others with an interest in the corporate form – the deemed offer to sell provision or a provision addressing the “involuntary transfer” of an interest in a corporate or other business entity. This provision can enhance the protections available, and assist with safeguarding the value of the entity in the event of a member, shareholder, or partner’s death, disability, bankruptcy, and/or dissolution of marriage.
Deemed offer to sell provisions are intended to address what happens to a member, shareholder, or partner’s interest in a business when life gets in the way. These are life events that we consider impossible, or improbable, or even so remote that we fail to plan for, or make contingencies for, the event ever occurring. In a deemed offer to sell, in the event of the death, disability, bankruptcy, and/or dissolution of marriage of an interested corporate person, the provision addresses how the individual’s interest will be valued, including the method of valuation, the price and payment terms, how the interest can be purchased, and the order of preference in purchasing the interest.
Consider this scenario: a member of a limited liability company becomes totally disabled, by reason of physical or mental impairment, which thereafter prevents him from performing the duties required of him/her as an employee, manager, or member of the entity for an extended period of time. A deemed offer to sell provision can address how the disability determination is made, including if the allegation of disability is disputed by the member. The provision may include language allowing a physician or panel of physicians to determine the legitimacy of the disability claim and the apportionment of the fees and expenses of the physician(s) serving on the panel. The provision should further address how the determination of disability will impact the member’s interest in the company, constituting a deemed offer to sell and allowing the company and other members to purchase the member’s units in the event of a total disability.
Even more likely, consider that 40% to 50% of married couples in the United States divorce, according to the American Psychological Association. Courts in Florida will ascertain what property owned by divorcing parties is marital or non-marital, and determine an equitable distribution of marital property and debt. Where the ownership of a business is involved, the divorce court will determine whether the business interest is marital or non-marital, and ascertain the value of the business interest.[1] [2] [3]
Property acquired during the marriage (including a business ownership interest) is presumed to be marital. If a business was formed prior to a marriage, the gain in value in the ownership interest which accrued by personal effort of the owner spouse during the marriage is deemed marital property subject to equitable division.
The decisions that judges make when valuing businesses in the context of a divorce are fact-intensive and usually heavily dependent upon the opinions of well-trained experts. The question is not whether the trial court can employ one method or another in valuing a business, but is more appropriately phrased as whether an expert may be permitted to testify and render an opinion based upon a valuation method that the expert claims to be acceptable within his or her profession.[4]
If the business is awarded to one spouse, the court may award other property or a monetary sum to the other spouse to obtain equalization.[5] However, a court may divide the interest in the business between the spouses, which can wreak havoc on the corporate entity and the other parties with an interest in the business.[6]
Any attempt by an interested corporate person, or his/her spouse, to transfer the individual’s interest in the corporate entity, such as pursuant to a property settlement agreement or pursuant to an order of the court issued to address equitable distribution of marital assets, can impact – often significantly – the value of the corporate entity and have dire and dramatic impacts on the corporate entity’s management and continuity. If the interest is a marital asset, and is divided by the parties voluntarily or pursuant to a court order, the “ex-spouse” could now share in the management and/or operation of the corporate entity without addressing what happens if such an interest is divided pursuant to an equitable distribution scenario.
The deemed offer to sell provision can include a requirement that upon the division of the interest, the interested corporate individual will have been deemed to have made an offer to sell his interest, and the corporate entity, as well as other interested corporate individuals, have the right to purchase the interest, upon prompt written notice to the company and the other interested parties. The provision can include a method for valuing the interest, including the retention of an independent appraiser, and the terms of payment for acquiring the interest.
A few courts – outside of Florida – have addressed these “buy-sell” agreements, or deemed offers to sell in the context of a marital dissolution proceeding.[7] Several courts have addressed these provisions in the context of other involuntary transfers.[8]
Without the protections afforded by a deemed offer to sell provision, which can be included in buy and sell agreements, operating agreements, and other corporate documents, the corporate entities at issue may be adversely impacted – fiscally and operationally – by these major life events for individuals with an interest in the corporate entity. This provision preserves the ongoing interests of the corporate entity, protects the rights of the other owners of the business to choose their partners, and provides the employees with a sense of security based on the knowledge that they will continue working for the individuals who hired them, and not an outside interest.
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[1] A trial court must base its valuation of a corporate asset upon competent substantial evidence. Greer v. Greer, 438 So. 2d 535 (Fla. 2d DCA 1983); Novak v. Novak, 429 So. 2d 414 (Fla. 4th DCA —), pet. for review denied, 438 So. 2d 833 (Fla. 1983). When property valuation is an integral part of the court’s entire plan of distribution, confusion as to value requires reversal of the property award. Saxton v. Saxton, 454 So. 2d 575 (Fla. 4th DCA 1984). The valuation of a business in a divorce proceeding is calculated by determining the fair market value of the business, which is the amount for which a willing buyer and a willing seller would exchange assets, absent duress. Fla. Stat. Ann. § 61.075. Typically, fair market value of a business that is subject to equitable distribution in a marital dissolution proceeding measures the value of the assets of the business plus the value of goodwill. See, e.g., Soria v. Soria, 237 So. 3d 454 (Fla. 2d DCA 2018).
[2] In Caruso v. Caruso, 814 So. 2d 498 (Fla. 4th DCA 2002), the court determined that a marketing corporation formed by husband the day after he filed a petition for dissolution of marriage was not a marital asset subject to equitable distribution, although wife participated in pre-petition meeting regarding product that was to be marketed, and husband used marital funds in combination with investment funds to finance corporation; licensing agreement to market product was signed nearly two weeks after dissolution, and corporation did not begin to successfully market product until the following year.
[3] See, e.g., Capozza v. Capozza, 917 So. 2d 365 (Fla. 5th DCA 2005) (shares of closely-held family corporation that were given to husband by his father upon the formation of the corporation were a gift, rather than income to husband, and, thus, were husband’s separate property not subject to equitable distribution in dissolution of marriage proceeding; neither husband nor his father ever treated the stock as income, husband had been prohibited from participating in corporation’s business for several years prior to the dissolution of marriage, and there was no agreement between husband and his father that would convert the transfer of shares into a business transaction); Mills v. Mills, 845 So. 2d 230 (Fla. 3d DCA 2003) (recognizing transfer of stock in construction business from grandmother to husband was a gift, rather than compensation for services performed for grandmother’s corporation, and thus, business was not a marital asset subject to equitable distribution in divorce); Vick v. Vick, 675 So. 2d 714 (Fla. 5th DCA 1996) (affirming trial court’s ruling that husband’s interest / stock in a company, given to him by his father, was not a marital asset, and recognizing that only increased value in husband’s interest attributable to marital efforts could be considered marital asset); Compare with Thibault v. Thibault, 668 So. 2d 237, 238 (Fla. 1st DCA 1996) (trial court correctly determined that the corporation was a marital asset, in that both parties contributed money and effort to the corporation); Gill v. Gill, 632 So. 2d 226 (Fla. 2d DCA 1994) (finding that the business itself was a nonmarital asset, as it was gifted to son by his mother, but that the enhancement to the value and appreciation of the business which resulted from the efforts of the husband or wife during the marriage or from the contribution to or expenditure thereof of marital funds or other forms of marital assets or both, became a marital asset);
[4] If the expert is permitted to so testify, then the trial court, as a finder-of-fact, should have considerable discretion in deciding to what extent it accepts or rejects the expert testimony. See, Erp v. Erp, 976 So. 2d 1234, 1237–38 (Fla. 2d DCA 2008).
[5] See, e.g., Toby v. Toby, 280 So. 2d 523 (Fla. 3d DCA 1973) (where husband and wife withdrew $15,000 from their bank account and made down payment on purchase price of corporation, after which, upon formation of corporation, husband received 99 shares in his name with one share being allowed to wife, upon dissolution of marriage chancellor properly refused to divide stock in issue equally, but husband should pay wife $7,500 with interest provided she elected to assign her one share of stock to him, while, in the alternative, court should, upon motion of wife, ascertain value of wife’s share as of time of entry of final judgment, and if the value be less than $7,500 award the difference to her in money with interest); Levy v. Levy, 862 So. 2d 48 (Fla. 3d DCA 2003) (in divorce action, trial court properly offset the award of business, which was marital asset, to husband by awarding wife other marital property to balance the equitable distribution); Schiller v. Schiller, 625 So. 2d 856 (Fla. 5th DCA 1993) (former husband’s interest in partnership could not be awarded to former wife upon marital dissolution; trial court could only award specific dollar amount for value of former husband’s interest, and only way to reach interest was to impose charging lien on it).
[6] Several courts have been reluctant to award spouses a shared interest in a corporate entity, particularly when they would be required to operate as business partners. In Robbins v. Robbins, 549 So. 2d 1033, 1033-34 (Fla. 3d DCA 1989), the court noted that granting a former spouse a shared interest in the stock of a closely held corporation has the effect of “requiring the former spouses to operate as business partners. Such a financial arrangement is intolerable.” See, e.g., Menendez v. Rodriguez-Menendez, 871 So. 2d 951, 952 (Fla. 3d DCA 2004) (parties must on remand present proper valuation evidence for the corporation so that the trial court may, as the parties agree, award this asset to one of the spouses and “devise a plan of distribution which causes the least interference with the ongoing business of the corporation, yet which is practical and beneficial to both spouses.”); Novak v. Novak, 429 So. 2d 414, 414-15 (Fla. 4th DCA 1983) (wife argued that trial court erred in failing to fix value for corporate stock and property so that the parties would not remain business partners, a result complained of by both parties since it creates the “intolerable situation of these erstwhile mates being required to operate a business together.); Manolakos v. Manolakos, 871 So. 2d 258, 260 (Fla. 4th DCA 2004) (“[d]issolution of marriage being what it is, it is clearly an abuse of discretion for the trial court to order two parties who have stated that they do not want to continue to work together after their divorce to do just that”).
[7] See, e.g., Stech v. Panel Mart, Inc., 434 N.E.2d 97 (Ind. Ct. App. 1982) (stock purchase agreement providing for sale of stock owned by decedent at time of his death obligated wife with whom stock was jointly held and who was also party to agreement to sell undivided one-half interest in stock to company as required by agreement); Haubenschild v. Haubenschild, No. A08-0097, 2009 WL 66377 (Minn. Ct. App. Jan. 13, 2009) (finding that summary judgment improper where purchase agreement contained a “divorce-trigger agreement to prevent division of stock,” and agreement could not apply since husband sold the stock back to the other shareholders prior to filing for a marriage dissolution); Brown v. Brown, 348 N.J. Super. 466, 490, 792 A.2d 463, 478 (App. Div. 2002), opinion corrected (June 11, 2002) (court property determined that neither marketability or minority discounts appropriate when the shareholder will retain his shares and the divorce will not trigger a sale of those shares); Roof Depot, Inc. v. Ohman, 638 N.W.2d 782 (Minn. Ct. App. 2002) (holding that former wife’s lien on stock held by her former husband, which was created to equalize property division under marital dissolution decree, was invalid and unenforceable, where stock certificate contained transfer restriction prohibiting involuntary and voluntary transfers, and former husband did not give corporation required written notice of his intent to encumber shares or offer corporation opportunity to exercise rights of first refusal); Castonguay v. Castonguay, 306 N.W.2d 143 (Minn. 1981) (holding that transfer of stock ordered by court in marriage dissolution proceeding was “involuntary transfer” not prohibited under corporation’s general restriction against transfers where restriction did not expressly prohibit involuntary transfers); Tolley v. THI Co., 140 Idaho 253, 260, 92 P.3d 503, 510 (2004) (finding that an involuntary transfer of the shares occurred, pursuant to the agreement, as a result of the divorce of a shareholder; construing the agreement, which was not ambiguous nor missing terms, the corporation had the option to purchase the shares but was not required to do so); Stevens v. Allied Builders, Inc., 74 A.D.3d 1757, 905 N.Y.S.2d 388 (2010) (section of option agreement prohibiting shareholder from transferring all or any portion of his shares of capital stock whether voluntarily or through any bankruptcy or other insolvency proceedings, adjudication of insanity, death, or otherwise did not apply to dissolution proceedings, since a dissolution proceeding was an involuntary transfer, the section did not prohibit involuntary transfers except as explicitly listed, and construing the section to apply to dissolution proceedings would have rendered meaningless a provision of the agreement stating that option-to-purchase provisions applied to dissolution proceedings); Mandell v. Mandell, 310 S.W.3d 531 (Tex. App. 2010) (shareholder’s agreement between husband and company in which he owned one-fourth interest by itself represented sufficient evidence necessary to value husband’s shares of company stock for purposes of equitably distributing the community property incident to divorce; shareholder’s agreement set value of each share at $0.50 and contained specific contractual provisions addressing stock ownership and value in event of a shareholder’s divorce, and valuation evidence was confirmed through testimony of chief financial officer of company who conclusively established that, when three of company’s seven physician-shareholders retired or left practice, they were each paid $0.50 a share).
[8] See, e.g., Renberg v. Zarrow, 1983 OK 22, 667 P.2d 465, 469–70n (stating, “The usual purpose of shareholders’ agreements which restrict the sale of corporate stock is to prevent transfers to outsiders without first providing an opportunity for the shareholders to acquire the stock. The agreement evolved as a device to assure the succession in interest of persons most likely to act in harmony with the other stockholders. Stock in a corporation creates a personal relationship analogous to a partnership, and shareholders in a close corporation should have the same right to choose one’s associates in a corporation as in a firm. Restrictive agreements designed to prevent sale of stock to outsiders must be strictly construed and cannot be applied to transactions which are not expressly mentioned in the agreement; nor can they be enlarged by implication.”); F.B.I. Farms, Inc. v. Moore, 798 N.E.2d 440 (Ind. 2003) (judgment lienholder, as former spouse of shareholder in closely held family corporation, had knowledge of restrictions on transfer of stock, and thus, lienholder, who purchased the stock at sheriff’s sale pursuant to execution of judgment lien, was bound by the restrictions on transfer); Sorlie v. Ness, 323 N.W.2d 841, 846 (N.D. 1982) (stating, “The use of certain restrictions on the transfer of shares imposed by charter or bylaw provision, or some agreement between the shareholders or between the shareholders and the corporation, are some of the devices evolved for assuring the succession in interest of persons most likely to act harmoniously with the other shareholders. The most popular restraint is the first-refusal option because it is considered the most serviceable and fairest type of restraint and also because of its universal acceptance as to its legal validity. The option may be granted to the corporation, to its shareholders, or to both.” (internal citations omitted); First Oklahoma Bank, N.A. v. Sparkman, 1992 OK CIV APP 159, 850 P.2d 350 (where corporate stockholder is bound by restrictive resolution affecting stock, such stockholder’s successor in interest must assume his transferor’s obligations regarding resolution and is bound thereby).
Nicole Deese Newlon is a Partner with Johnson in Tampa, Florida. She represents clients in complex litigation matters in the areas of business and family law. Nicole can be reached by phone at (813) 699-4859 or on the web at www.jnd-law.com.
