Sometimes, a divorced couple is required to maintain a professional relationship long after their personal relationship has ended. So how do former spouses who are still involved in managing a business balance the required business interests and fiduciary duties? What is the duty of the managing spouse (the spouse still in control of the business’s day-to-day) and what are the risks for the out-spouse (the spouse who is not active in the business’s daily management) that his/her interests might be impaired? Read on to learn how a managing spouse must balance their fiduciary duty with the need to run a successful business and how the out-spouse can be protected from abuses by the managing spouse.
The recent case of Gréaux and Mermin (2014) (Court of Appeal, 1st Appellate Dist., 4th Div. 2014) addressed the challenging issues raised when husband and wife co-own a business. The key points of this case involved whether a court is authorized to issues a non-compete order against the spouse who is no longer involved in the business and what are the limits of that non compete order.
The facts is the case are as follows… Husband and wife owned and operated two businesses, Specialty Application and Finishes (SAF) and Saint Bart’s Spirit Company (SBSC). At the request of the parties, SAF was assigned a zero value and awarded to the husband. After consideration of all applicable factors, the court declined to award spousal support to either party. The primary dispute related to SBSC. SBSC was created from the parties’ joint efforts during the marriage, and therefore was community property. The business of SBSC was to formulate and market a particular type of spirits called “rhum agricole.” Both parties brought unique talents to SBSC.
At trial, the wife offered evidence indicating that husband’s “efforts to run SBSC post-separation were less than exemplary,” but ignored her own part in taking actions aimed at destroying both the business and the reputations of persons “upon whom and whose good will SBSC’s future depended.” Ultimately, wife acknowledged that “had she considered it [when she filed the actions] she could not have failed to perceive their debilitating effects on the business. . . .”
The trial court awarded the business to the husband, finding that while the wife was “exceptional at marketing and sales, the husband was “better qualified by experience to run the business”. ‘Further, husband had ‘demonstrated the will and ability to [run the business] under extremely adverse circumstances,”’while wife had shown “a willingness to sacrifice the interests of SBSC for what appeared to have been little more than spiteful retribution.’”
This dispute is similar to the case of Marriage of Dekker (1993) 17 Cal.App. 4th 842, where husband and wife started a business called Gas Turbine Services (GTS) together in 1983. Stock was issued in the wife’s name alone to protect it from the husband’s former wife. The husband was an incorporator, director, president and primarily responsible for GTS’ success. However, after the husband filed for divorce, the wife called meeting of board of directors and fired him. The court placed GTS in receivership. At the request of the receiver, the husband was reinstated as chief executive, and the wife was enjoined from entry upon GTS premises. The holding in Dekker dealt with application of the Pereira formula and whether the husband was judicially stopped from claiming he had an interest in the business because he had filed a declaration in an action with his ex-wife that he had no interest in the business.
In both cases, the wife attempted to kick the husband out of the business using extreme legal means and it backfired. Dekker is interesting because the remedy of receivership was used to reinstate husband in the business. While this remedy is seldom used, it was effective in wresting control of the company from his wife. In Gréaux the court awarded the business to the husband.
When handling disputes between husband and wife co-owners of businesses, it is important to manage the client behavior so that it does not backfire on the party who wants to carry on the business.
For more information on balancing business interests and fiduciary duties, contact family law attorney Peter Walzer.