woman-man-arguement-divorce

Sarah Kraettli*, 54, is a wealthy business owner who married her fourth spouse five years ago. She faces ongoing support obligations, and two of her ex-spouses are suing her. Her first spouse has shares in her company and could complicate plans to sell. Three experts explain her best options.

The situation

Sarah’s 54 and has more money than time, and the needy men she finds attractive tend to notice that three or four years into a marriage.

She started a value-added distributor/retailer computer business in Kitchener, Ont. during the mid-1980s, and graduated to acquiring software companies in the ’90s. She now owns licensing rights to a popular customer management system, and two database management systems that are used in the retail shipping and aeronautics supply chain industries.

All this has made her fabulously wealthy. Her firm, which still does wholesale computer furniture distribution, yields her an annual paycheque of $1.8 million. The company nets $4 million annually after expenses, but much of that profit is plowed into a slush fund earmarked for the next acquisition. Annual earnings from the three licensed products total $10.4 million and the side businesses earn an additional $1.2 million.

Her lavish apartment occupies the top two floors of a downtown building, and she owns a home in Collingwood, Ont., where 47-year-old husband number four, Carter, spends most of his time skiing or hiking (that is, when he’s not writing emails or texts about how lonely he is and detailing what he’ll cook for her when she deigns to stop by). Carter has threatened divorce, but has yet to take action.

Her problems are ex-spouses one, two and three, and potentially number four. She has no children.

Sarah’s wealth, and the lack thereof among the men she’s married, has proven expensive. Her first three spouses were able to show they had no visible means of support beyond her income, and two were able to prove they were solely occupied with home making (the third was a fledgling singer/songwriter who reported only $28,000 in income during their five-year marriage).

As a result, Sarah’s got some hefty bills:

  • David, who’s 56, receives $125,000 in annual support after a four-year marriage that ended in 1989. He lives in a downtown Calgary apartment and occasionally emails for supplemental funds after a lavish week of spending. These emails are deleted, unread.
  • Derek, 54, got a $175,000 settlement following a 1997 separation, even though the couple was only together three years and the relationship was common-law. He also took what Sarah estimates at $350,000 in furniture and art. Derek claimed to have chosen the items with loving care during mediation discussions, and Sarah agreed to let him have the objects in order to speed resolution.
  • Maynard, 49, is getting $150,000 annually after a 2005 divorce. Even though he had some income, he was able to produce a letter Sarah had signed when they’d met in 1998 saying she believed in him and would fund his music dreams until he signed a record deal. He returned to Texas after the marriage ended and occasionally complains about how the fluctuating loonie makes his budgeting difficult. On the possessions side, he considered himself lucky to get out with his guitars and recording equipment as Sarah ranted about that “thief whose name started with D.” He was never sure if she was talking about David or Derek.

She also made the mistake of giving David 7% of her company’s shares to sweeten the deal. She had the presence of mind to write a cohabitation agreement with Derek and a prenup with Maynard, which specify spousal support and communal property only. She has a similar prenup with Carter.

Both Derek and Maynard are suing for the same deal David got, citing precedent. So the 7% of her company she’s given up could turn into 21%; and she could be looking at 28% if Carter’s loneliness gets the better of him.

What can Sarah do to stanch the financial bleeding and ensure there’s enough left for when she decides to leave the rat race?

The experts

Susan Jack

Susan
Jack

partner,
Smith Family Law Group

Susan Latremoille

Susan
Latremoille

director, wealth management, wealth advisor,
The Latremoille Group, Richardson GMP Limited

Neil Maisel

Neil
Maisel

partner,
Crowe Soberman LLP

The 7%: A necessary evil

SJ: The marriage to David lasted four years, ending in 1989. He got annual support of $125,000 in a negotiated resolution. Because they were married, he was entitled to an equalization payment, and it appears the 7% of Sarah’s company was intended to satisfy that.

Most people would have figured out a cash settlement to cover the equalization payment. She should have asked herself, “Do I want to be tied to this person for the rest of my life?” A clean break is usually better. Having him as part-owner of the business continues their ties.

But at the time she may have had little choice. Her company could have been cash-poor; perhaps she was making a large capital investment for an expansion. So she may have said, “Instead of me giving you cash, why don’t I give you 7%?” The shares may also kick out an income. And it’s a minority interest, so he’s not going to have control, as long as she doesn’t start giving pieces to other people.

NM: I agree. Sarah’s company was a start-up. The company was about four years old when they separated. Often when you’re in this situation, you’re reinvesting profits to grow the company—you’re not taking a lot of money out because there’s not enough discretionary cash flow. Consequently, it may have been easier for her to give David 7% of what she perceived to be a small start-up. If the company later became a hit, that’s great; but at the time, that 7% may not have seemed too onerous.

Small share, big hurdle

NM: We don’t know if Sarah and David have a shareholder’s agreement. Ideally, you create one at the point when there’s more than one shareholder, though you can still do it five, 10, 20 years later. You can’t force anyone to sign these agreements; that’s why it’s better, if possible, to draw one up at the outset. Down the road, it can be more complicated to get it signed.

SJ: The minority shareholder should also want an agreement, because the majority shareholder can make key decisions without the minority shareholder’s consent. The latter should want to know exactly what rights he has, and what he’s entitled to, so there’s no confusion at a later date (for more on shareholders’ agreements, see “Buy out your partner,” page 1).

NM: If Sarah and David don’t have an agreement, Sarah may want to approach him about getting one. They would thrash out various scenarios during this conversation: for example, what would happen if she wants to sell, if she dies or if he dies.

It’s likely she’ll start for a looking a buyer at some point, but when that happens depends on a lot of things, including her financial situation, health, personal life, the nature of the economy, et cetera. She has no children to pass the business on to, and we don’t know if there’s a niece, nephew or other family member she’d consider. Given her age, she may start thinking
about selling.

If Sarah and David have a shareholder’s agreement specifying what’s going to happen under various circumstances, it’ll make life easier for everyone. But if there’s no agreement, the situation gets murky. For instance, say she decides to sell and gets an offer for $15 million; David may say they could do better, potentially holding up a sale.

Sarah can try to avoid this by buying David out. She’d provide him with a valuation that suggests, for instance, that his interest is worth $1 million. David’s team may urge him to accept, in which case Sarah would have
100% ownership.

But he may say, “I know your valuation came in at $1 million, but I’d be prepared to sell you my share for $1.5 million.” Then Sarah would have to decide if she should pay what appears to be a premium to get rid of him. And she might.

And Sarah may have another problem. Because David’s a shareholder, he likely has access to the company’s financial statements. With professional assistance, he may claim part of Sarah’s $1.8-
million annual paycheque. He would need to have a compensation expert assess the fair market value of the work she’s doing for the company. Say the expert puts the number at $400,000. David could then argue that 7% of everything beyond that $400,000—in this case 7% of $1.4 million—is rightfully his.

He would essentially be saying, “You’ve actually been drawing out some of my equity, and you owe me because you’ve reduced the value of my 7% of the company by taking out more than you were entitled to.”

The lawsuits

SJ: Derek and Maynard are each suing for David’s deal. One of the first things Sarah’s lawyer should do is think about dispute resolution processes that don’t involve the courts.

She may not want this matter to become public. Once it goes into litigation, she has to make disclosures that become public. There’s a transcript and typically anyone can sit in the trial gallery (other than witnesses who haven’t given evidence yet). To avoid this, she’d have to persuade a judge to issue a sealing order; but that’s difficult, so she may choose to mediate out of court. Or she may suggest arbitration, which means she would hire a private adjudicator who has the authority to make the decisions. That’s a private process.

Because she’s dealing with more than one person, if she makes out-of-court settlements there should be confidentiality agreements. So, if she struck a deal with Derek, he wouldn’t be able to tell Maynard what he got. All that said, neither Derek nor Maynard appear to have much weight to their cases. Sarah has signed agreements with each that stipulate support and communal property only; presumably the agreements say that, in the event of separation, Derek and Maynard give up their rights to anything further. Those agreements are in place unless the parties agree to change them, or a court orders they
be modified.

Derek and Maynard claim to be citing David’s deal as precedent, but precedent comes from case law; it doesn’t come from saying, “David got 7% in his negotiated resolution, so I should have gotten the same.” Each case has its own separate circumstances, and the fact someone else got a better deal doesn’t mean you’re entitled to the same.

Derek’s case is particularly weak. He was the only one in a common-law relationship. He and Sarah had a cohabitation agreement and he’s been receiving a very generous $175,000 annually for
17 years now.

That already seems excessive given the short duration of the relationship. Because they were common law, he didn’t have automatic property entitlement the way a married spouse would.

NM: Agreed. For both Derek and Maynard, this 7% claim seems to be pie in the sky.

SJ: If Carter considers separation, his entitlement will be governed by the terms of his prenup.

*This is a hypothetical client. Any resemblance to real persons, living or dead, is purely coincidental.

Managing Sarah’s wealth and estate

SL: Business owners are often so busy running their businesses and private lives that making money on their money gets neglected. Based on what we know about her situation, her portfolio might look like this:

  • Cash. I wouldn’t see any need for cash apart from her immediate liabilities, an emergency cushion, and perhaps a slush fund, also, depending on what happens with her spousal disputes.
  • Fixed income. With rates so low, I would suggest only about a 20% allocation, just to give the portfolio some balance.
  • The asset classes I’d be allocating to more heavily are:

  • Equities. I would divide them up geographically—Canada, U.S. and the rest of the world—and by market-cap, so we’d have a combination of large-cap, mid-cap and small-cap. Sarah has enough wealth that we can look at multiple styles, incorporating passive, active, growth and value.
  • Alternatives. She already owns private equity through her company. So, we would have a conversation about whether she also wants to own other private businesses. Because her fixed income is fairly low, I’d be using some hedge funds to offset volatility that’ll naturally arise in the equity market. These are “hedged” hedge funds, designed for risk management and capital preservation, and not hedge funds for the purpose of gambling. We would hedge currency risk and interest-rate risk, for instance.We would also look at estate planning. She must have a clear will, powers of attorney, and up-to-date beneficiary designations.

    I also suggest an integrated approach between investment and insurance solutions. In Sarah’s case, there are specific business-
    related insurance concerns.

    For instance, depending on the senior management team she has in place, she may consider key-person insurance on her life. Also, Sarah should have all her medical expenses covered by a company health plan. If spousal support obligations are ongoing, she should look at the viability of using insurance or a term-certain annuity to fund them.

  • Dean DeSpalatro, senior editor of Advisor Group

    Originally published in Advisor's Edge Report

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