I know of a son of a business owner that died after suffering a heart attack while he was exercising at a gym. He suddenly collapsed on the floor, gasping for breath, a CCTV video recorded his final moments. In the video the man can be seen sweating after walking on the treadmill. He takes off his jacket, while feeling dizzy he tried to take support from a table kept nearby, but collapsed. The statement of the gym owner, “We confirm that he is a client and he used to come to the gym every day. Today, he suddenly suffered a massive stroke and everything was over within three minutes.”
It was fatal and the wife could not do anything. His death left not only a grieving widow and his minor three children, but also a total vacuum of authority at the company. He was just 43 years old, appointed executive director by his father, head of marketing and a successor in waiting. He passed on leaving no will.
The family, especially the founder, was devastated but the events that followed after the grieving period were shocking and unexpected.
By law and in the absence of any marital agreement, the surviving spouse assumed ownership over the shares of her deceased husband and was subsequently elected to the board. What were her qualifications? None except that she used to be a pastry chef in an international hotel chain and the wife of the deceased husband/shareholder. Her assumption to share ownership was by virtue of the law on inheritance. Here we have a scenario where the law can embolden a surviving spouse to disrupt a family business.
After being outvoted several times during board meetings, the wife became hostile. Two years after the death of her husband, the spouse remarried. With the entry of her new husband, a brash talking litigation lawyer, the hostility escalated to a new level of conflict. One day, the former in-law, now shareholder and member of the board, called for an emergency meeting appointing her new husband to stand in as her proxy. Meetings always ended with so much hostility on all sides. In the end after repeated but unsuccessful attempts to derail important decisions of the enterprise, the wife decided to engage in talks with a likely competitor to further infuriate her former father-in-law. My firm, W+B Family Advisory, was then called to mediate the warring parties.
The Dangers of Neglecting Marital Agreements
As a family business grows and is passed on to the children, concerns arise as to the next generation’s and their spouse’s rights to own and control the business. One of the primary concerns is the voting, authority and economic rights of spouses of next-gen owners in situations of legal separation or death. Given marital property law in general, a spouse of an owner could acquire ownership rights in the business simply by virtue of being married to a family member.
Therefore, it is important to address ownership issues proactively to clarify the roles of the next-gen owners and their spouses. There are three issues to consider with regard to the spouse of a family member:
1. Is the family open to the next generation spouse acquiring shares in the company?
2. Could the spouse acquire an interest in the value of the business to the extent that the spouse might be entitled to some form of payment for the value of his/her spouse’s interest, in a separation or death situation? Or
3. Would the family just prefer that the spouse do not own any shares passed on by the parents/founder?
If the earlier generation’s owners have concerns about these situations, we would usually prepare several agreements to bind spouses. The intent of such an agreement is to protect the financial interests of the business in cases of separation, annulment or when applicable, divorce, incapacity or death.