Tuesday, February 2, 2021

Divorce as a (last) exit** event under a shareholders’ agreement

With the annual spike over the festive season in family law issues, it seemed timely to consider the issue of how the divorce of an individual principal of a company can be addressed under a shareholders’ agreement (or similarly under a partnership or unitholders agreement).

Broadly we see the 2 main approaches as being:
  1. having divorce as a specific triggering event allowing the other owners to buy the divorcing shareholder’s interest; or
  2. drafting a right of first refusal and pre-emption arrangement broadly enough to capture any proposed transfer as a result of a divorce of a shareholder.
Our approach generally is the second alternative outlined above, unless there are specific reasons to adopt some other process.

Normally there would not be any vendor financing arrangements included into the agreement, although these can always be agreed between the parties at the date of sale, if they are on amicable terms.

It is important to note that any shareholders’ agreement should not be intended to avoid complying with any obligations under a property settlement, rather it should make sure that the non divorcing owners can continue to run the business in the most effective way without being in business with a principal’s spouse or an unrelated third party.

** for the trainspotters, ‘Last exit’ is a song from Pearl Jam. View hear (sic):