Yours, Mine And Ours
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Would a prenuptial agreement have prevented a costly settlement in a recent divorce where the heir to a well-established family enterprise put a large dent in the family's fortunes by agreeing to pay $23 million to his spouse, who was forced to relinquish her interests in the family concern?
No one can say, because Prince Charles and Princess Diana didn't have a prenuptial agreement. But chances are if any of Queen Elizabeth and Prince Philip's children remarry, they will be urged to sign one.
Contentious divorces don't just upset empires; they can also topple long-established family businesses. That's why so many heads of family businesses want their adult children to sign prenuptial agreements.
This is a difficult subject to broach. "The spouse-to-be can see this as a proviso to full family acceptance, and it can chill relationships for years," says Tom Hubler, president of Hubler Family Business Consultants Inc. in Minneapolis. It also can harm the young couple's relationship.
"The [spouse-to-be] frequently perceives the [family's] son or daughter as more loyal to the family than to establishing a loving relationship," says Ross Nager, director of the Arthur Andersen Center for Family Business in Houston.
"Prenuptials are talked about more than they're implemented," adds Nager: People find it emotionally difficult to plan a divorce at the same time they plan a wedding.
Testing The Waters
Is something that unleashes such negative emotions worth contemplating? Consultants say yes. "A prenuptial agreement is just a tool. It's how the tool is used that determines its effect," says Hubler.
In a divorce, the in-law spouse may seek a lump-sum settlement and go after the family member's shares. He or she may even own shares. In either case, "it is not a good idea to keep a divorced [partner] as a partner in the business," says Nager.
If parents broach a prenuptial discussion when the first adult child gets engaged, the perception is "You don't like my fiancÃ©." That's why formulating a policy that applies to all family members before the children even think of marriage makes sense, says Jeff Wolfson, a partner specializing in family business at Boston law firm Goulston & Storrs.
Even if no policy exists, the issue should be raised. Hubler suggests initiating the discussion with the engaged couple and framing it positively--not as "we" against "you," but as a way of satisfying both generations' interests and all parties' goals.
Hubler recommends starting with something like this: "Owning a family business is a unique situation, and we want you to know our views of stock ownership. This has nothing to do with how much we love you--because we do and we couldn't be happier that you're part of the family. We want to do everything possible to help you satisfy your own interests and move toward your goals. The idea is to create a win-win situation."
If the subject is first discussed by parents with their adult child, which Nager says is more common than two couples sitting down together, "the parent might say something like `Michael, we really love Jennifer, but there's something we need to talk about--something that's important to the business and to the family.' "
Try these techniques to keep prenuptial discussions on a productive path:
- Introduce the idea using a magazine or newspaper article that points out the concept's weaknesses and strengths.
- Find another family business you know that also faced this situation, and suggest your couple talk to the couple in that business.
- Use a neutral third party everyone trusts to facilitate the discussions.
- If an agreement is reached, make sure each person is represented by separate counsel. The agreement must protect both parties, provide full and fair disclosure of assets and liabilities, be entered into voluntarily, and be completely understood by both people.
Nager has seen several instances where prenuptials are discussed among family members, but the subject goes no further because the adult child can't summon up the nerve to broach it with his or her intended. If an agreement can't be reached or the discussion can't get off the ground, there are alternatives to ensure that the stock stays in family hands.
Nager suggests a shareholder's agreement with a buy-sell provision that clearly delineates the circumstances under which stock is bought back from shareholders--divorce being one of them. He also suggests that if no stock has been distributed to the adult children yet, the parents should put the stock in trust for them. "The agreement can be written so that in-laws have no rights to trust assets," he explains.
Making plans to protect the business in the wake of a divorce shouldn't prevent you from valuing in-laws as a tremendous resource for the business. "Excluding in-laws from information creates problems," says Hubler. "Not only that, it robs the business of the unique perspective spouses can bring."
Whatever approach is taken, Wolfson counsels, "the older generation should always listen to and acknowledge the younger generation's concerns." That's sound advice for any family business.
Arthur Andersen Center for Family Business, 711 Louisiana, #1300, Houston, TX 77002, (713) 237-2770;
Hubler Family Business Consultants Inc., (612) 375-0640, fax: (612) 342-2580.