While some people may buy 10 shares of Microsoft, an infinitesimal amount of stock with zero voting power, other people may buy stock that allows them to control a portion of the company. Upon a significant sale of stock, the remaining stockholders have a new business partner…and that business partner often has a spouse.
The spouse of a stock purchaser will then be asked to sign what is called a “Spousal Consent Form.” Every spousal consent form is different but below is an example:
“The undersigned spouse of [Spouse’s Name] (the “Purchaser”) has read, understands and hereby approves all the terms and conditions of that certain Stock Purchase Agreement dated as of [ ], (the “Agreement”), by and between [Name of] Corporation, a corporation (the “Company”), and the Purchaser, pursuant to which the Company granted to the Purchaser shares of common stock of the Company (the “Shares”).
In consideration of the Company selling my spouse the Shares under the Agreement, I hereby agree to be irrevocably bound by all the terms and conditions of the Agreement (including but not limited to the Company’s Repurchase Option and Right of First Refusal, the Company’s limited irrevocable proxy and the market standoff agreements contained therein) and further agree that any community property interest I may have in the Shares will be similarly bound by the Agreement.
I hereby appoint Purchaser as my attorney-in-fact, to act in my name, place and stead with respect to any amendment of, or exercise of any rights under, the Agreement.
Upon the signing of a spousal consent form, the spouse relinquishes any rights to exercise the stock they might have under their state’s divorce laws.
Spousal consent for stock purchase agreements exist in order to mitigate the risk that a spouse (or, more likely, an ex-spouse) may attempt to assert an interest in the shares. This new, surprise owner (who is fresh out of a divorce) can cause the company, as a whole, difficulty.
Spousal consent forms are not as important in Illinois where there is no community property in divorce. Community property is the presumption that each spouse gets 50% of any asset either spouse acquired during the marriage.
In Illinois, property can be divided almost any way a divorce court deems fair. Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors” 750 ILCS 5/503(d)
It’s important to note that the relinquishment of the capacity to exercise the stock because of the stock-owner-spouse’s exclusive right to have an “irrevocable proxy” does not mean that the non-stock-owner-spouse relinquishes the value of the stock in a possible divorce.
Share Transfer Restrictions And Spouses In Illinois
In addition to the spousal consent form, a corporation’s shareholder agreement usually does not allow the stock-owning-spouse to unilaterally transfer their stock to the other spouse.
“[T]he most likely purpose for share transfer restrictions in close corporations is to prevent outsiders from purchasing shares and potentially damaging the company.” Maurer v. Haines City Mobile Park & Sales, Inc., No. WD-00-051,2002 WL 479771, at 4 (Ohio Ct. App. March 29, 2002)
While share transfer restrictions exist…courts do not like them.
“As a general rule, provisions restricting a stockholder’s right to sell or transfer his stock are regarded with disfavor and are strictly construed.” 18A Am. Jur.2d Corporations § 683, 561 (1985)
Most shareholder agreements include procedures for transfers that are involuntary. After all, every shareholder will eventually die. In the absence of language regarding involuntrary transfers, the presumption is that there is no restriction on involuntary transfers
“[R]estrictions on the sale of corporate stock apply only to voluntary sales, and not to transfers by operation of law…in the absence of a specific provision to that effect.” 18 C.J.S. Corporations § 220 (1990)
“[A] transfer of stock ordered by the court in a marriage dissolution proceeding is an involuntary transfer not prohibited under a corporation’s general restriction against transfers unless the restriction expressly prohibits involuntary transfers.” In re Marriage of Devick, 735 NE 2d 153 – Ill: Appellate Court, 2nd Dist. 2000) (citing In re Marriage of Banach, 489 NE 2d 363 – Ill: Appellate Court, 2nd Dist. 1986)
“[U]nder the rule of strict construction, a restriction on the transfer of stock does not apply to interspousal transfers of stock which is marital property absent an express provision prohibiting such transfers.” In re Marriage of Devick, 735 NE 2d 153 – Ill: Appellate Court, 2nd Dist. 2000 (citing Bryan-Barber Realty, Inc. v. Fryar, 120 N.C.App. 178, 461 S.E.2d 29 (1995))
Because of the possibility of a spouse being automatically awarded voting shares in an Illinois divorce, when drafting “such a restrictive stock agreement, it may be necessary for the shareholder’s spouse to join in the agreement [via a spousal consent form]” In re Marriage of Devick, 735 NE 2d 153 – Ill: Appellate Court, 2nd Dist. 2000 (citing Bryan-Barber Realty, Inc. v. Fryar, 120 N.C.App. 178, 461 S.E.2d 29 (1995))
Share Transfer Restrictions In An Illinois Divorce
In the absence of a stock transfer restriction, either spouse can buy the other spouse’s share in the stock.
“If [a] stock does have value, [one party] has the option to purchase the [other party’s] interest at a nominal figure.” In re Marriage of Simmons, 409 NE 2d 321 – Ill: Appellate Court, 1st Dist. 1980
Or, in the absence of a stock transfer restriction, a court can divide any asset as it sees fit.
“[T]he power “to divide the marital property” given the trial court by section 503(d) includes the powers necessary to render effective the power to divide.” In re Marriage of Banach, 489 NE 2d 363 – Ill: Appellate Court, 2nd Dist. 1986
Being a shareholder means owning a business. Illinois divorce courts prefer to award an entire business to one spouse with a cash offset to the spouse that is not awarded the business.
“Courts have generally found it unwise to divide a business interest in kind because it would necessitate an ongoing business association between the parties. Therefore, where property, such as a business, is not susceptible to division in kind or such division would be inequitable, the court may, in its discretion, award the property to one spouse, subject to an obligation to pay the nonacquiring spouse for the interest lost. Such repayment may be made by offsetting other marital property or by payment in cash, either in gross or installments.” In re Marriage of Banach, 489 NE 2d 363 – Ill: Appellate Court, 2nd Dist. 1986
A shareholder agreement’s share transfer restrictions provide Illinois divorce courts with further encouragement to award a business and its share in their entirety to one spouse as shareholder agreements can operate as a post-nuptial agreement.
Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions considering…any prenuptial or postnuptial agreement of the parties” 750 ILCS 5/503(d)(7)
“[Post]nuptial agreements determining the rights of spouses to property or maintenance are valid and enforceable so long as (1) an unforeseen condition of penury is not created due to lack of property resources or lack of employability (2) the agreement is entered into with full knowledge and without fraud, duress, or coercion and (3) the agreement is fair and reasonable” Warren v. Warren, 523 NE 2d 680 – Ill: Appellate Court, 5th Dist. 1988
Nowhere in any spousal consent form will it be acknowledged that the share-holding spouse holds the shares as non-marital property not subject to division. Rather, the implication is that the share-holding-spouse will keep the shares as their part of the marital estate per the agreement between the two spouses and the corporation.
The real issue is the value of the shares and the subsequent cash offset to the spouse who is not awarded the shares. The value of the shares in a closely held corporation may not be the true offset price.
“In a close corporation the corporation’s shares are not listed on a stock exchange or actively dealt in by brokers and, therefore, there is no established market for the corporation’s stock. The shareholders of a close corporation, however, like those of any corporation, do realize a value from stock ownership in that they have certain rights of control or future profits. Furthermore, courts have recognized an ascertainable value for shares of stock in closely held corporations.” In re Marriage of Olsher, 397 NE 2d 488 – Ill: Appellate Court, 1st Dist. 1979
This means that experts must be hired to determine the value of the shares awarded to the share-holding spouse in order for the court to determine the offset amount (if any).
If you cannot tell by now, business people can and will contract for anything…including the valuation of shares in the event of a divorce (so long as the non-member spouse also has the option to contest that valuation).
“We see no reason why the trial court should have entered an order that conflicted with the terms of the operating agreement when the operating agreement specified the valuation process in the event of a divorce and allowed for the nonmember spouse to contest the valuation during divorce proceedings.” In re Marriage of Schlichting, 19 NE 3d 1055 – Ill: Appellate Court, 2nd Dist. 2014
Whether you know it or not…you are in business with your spouse. When you divorce your spouse, you divide that business based on the agreements between you, your spouse and the business. Legal concepts such as the statutes and case law enumerated above will fill in the gaps. So, be sure your divorce attorney understands your divorce, your business and the law in all its forms. Contact my Chicago, Illinois family law firm today to speak with an experienced Illinois divorce attorney.