Risk of Divorce to Closely Held Businesses: When Private Business Information Becomes Anything but Private

Client Alerts · November 14, 2011

What comes under a microscope when the owner of a closely held business is involved in divorce litigation? The short and painful answer is, that unless plans have been put in place, every aspect of the once-private company becomes open to review, scrutiny, and attack.  As property, a divorcing shareholder’s interest in a closely held business is considered a marital asset, subject to division.

The extent and scope of the shareholder’s interest is the subject matter of the initial inquiry. Then the “drilling down” begins. Questions such as these will be asked, and will require answers:

  1. What is the value of the entire closely held corporation?
  2. What is the value of the shareholder’s interest?
  3. Are the salary, bonuses and dividends paid to the owners and/or executives reasonable in light of the financial circumstances of the company?
  4. Is the amount of retained earnings at the time of the divorce appropriate in light of the past history of retained earnings?
  5. Are the business expenses and deductions taken by the closely held company and its owners customary, usual, and reasonable?

Corporate documents are relevant and must be disclosed to the other side. Five years of tax returns, financial statements, schedules of inventories, key man insurance policies, buy/sell agreements, and pending and failed offers to purchase are just a few examples of the required documentation. The need to produce such securely guarded, and often sacrosanct, documents is never welcome news to the shareholder, but it becomes especially difficult for the non-divorcing shareholders.

Once the discovery and valuation challenges have been met, then the conundrum of how to divide/assign/allocate the value of the closely held company becomes the focus of attention. What are the options and which one(s) are most suitable to the given situation? What is the impact on the company and the other shareholders?

If you have any questions about the information presented here, or would like to learn more about how Prince Lobel can meet the needs of your closely held business, please contact firm partner Robert P. Maloney. You can reach Bob at 617 456 8008 or rmaloney@princelobel.com.