Divorce advice for high net-worth individuals (and billionaires)- Part three: Business assets

Divorce Advice for billionaires and high net worth individuals – Part three: Business Assets

BUSINESS ASSETS

Billionaires and high net-worth individuals most often than not, own businesses. That’s how they became billionaires in the first place. Either they inherit family business that are run by “family offices”  or they created the business prior to marriage, or they create the business during the marriage. Usually, only those businesses that are created during marriage are at issue in a divorce case. The two former models could potentially be at issue as far as “appreciation” of the business assets during the marriage, and “co-mingling” these separate business assets with marital assets during the marriage. But

Copyright 2010 by Divorce Saloon. All rights reserved

most billionaires have enough sense not to do that, and hopefully most will get a prenup or a post-nup to protect their business assets from a divorce fallout.

 With regard to those businesses that are formed during the marriage, what are the consequences for billionaires and high net-worth individuals when they divorce and are forced to “equitably distribute” or share the business assets with a spouse? In many states, but not all, it matters who actually owns title to the business. But in some states, title does not matter as much. If the business was formed during the marriage, it’s community marital property.
In California, for example, it doesn’t matter who owns title to a business. In Massachusetts by contrast, who owns title to the business matters and this will be a factor that is weighed to determine who gets what. Massachusetts and New York and states like Connecticut and Georgia are what are called “equitable distribution” states. The good thing for the “ten-figure net-worth businessman” set, in these states, is that “equitable” does not necessarily mean “equal” so such things as contributions to the business by your spouse will help the divorce judge determine how much of the business assets the paying spouse has to relinquish in a divorce.

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 In recent years, billionaires and high net-worth individuals have gone on the offensive. Several have simply made themselves broke or bankrupt to get out of the obligation. There is one multi-millionaire, Scot Young, in UK, who was threatened with jail time if he did not provide the court with an accounting of his £400 million pounds worth of business assets because after his wife filed for divorce, he mysteriously went from being a multi-millionaire, to being dead broke, almost overnight, and he also claimed at some point to be so mentally out of it, he had to check into a mental ward – a claim, his wife Michelle (?) dismissed as bogus.
Other billionaires and multi-millionaires don’t fight as dirty, but they do fight to keep most of their business assets by claiming that their spouse “contributed nothing” to the business.
There have been a slew of billionaires whose divorce involved issues relating to how to divide business assets, to wit: Frank and Jamie McCourt in California; Edra and Tim Blixseth in Montana; Steve and Elaine Wynn in Nevada; tech tycoon Theodore Waitt (Forbes Magazine claims he had to sell his company Gateway when he divorced his wife Joan, presumably so that he could afford to pay her a settlement); Russian tycoons Roman Abramovich and Dmitri Rybolovlev; and Lascelles Chin in Jamaica, among others. All were faced with the matter of divvying up business assets in a divorce.
Except, possibly, for Steve and Elaine Wynn, most of these couples ended up in major contentions about the business assets and how they should be divvied. They could never agree on the details such as what “stake” the complaining spouse was entitled to and what would be a “fair” distribution of said assets. This all could have been avoided with properly executed prenups and post-nups. But not always. Look at Frank and Jamie McCourt. They had a post-nup. But it didn’t do them much good. They are still embroiled in a big time divorce trial in California, litigating the issue of which of them owns how much of the Dodgers franchise.

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 And they are not the only ones. There is a case pending right now in California between presumptive billionaire Elon Musk and his wife Justine Musk. The couple did execute a post-nup but Mrs. Musk is claiming that there wasn’t full disclosure and she wants a bigger stake in the business assets of several companies her entrepreneurial husband has formed such as Tesla Motors, Space X and others. This public battle became all the more notorious after Mrs. Musk took to the blogosphere to give the world a play by play of the behind-the-scenes shenanigans of their divorce on her personal blog, Love, Soul & Vision.
The problem, of course, with public battles over business assets is they could potentially have a negative impact on the value of the company, if, for example, it’s publicly traded, or if the business owners want to do an IPO. Because prospective investors may shy away from a stock it is revealed in the company prospectus that a major shareholder’s divorce settlement involves business assets of that company. This could ultimately be a problem for both spouses and sometimes even their heirs. The conventional wisdom is to use prenup and postnups. But if, as in the case of the Musks and McCourts, that fails to work, eschew the public circus at all costs. Try mediation instead.

 If couples insist on going ahead with the litigation model vis a vis the mediation model, there are many issues to consider when couples litigate the issue of business assets. How and when was the business formed? Is this an inheritance?  What is the structure of the business? A corporation with shareholders? Is it publicly traded? How many shares are at issue? Is it a partnership? What does the partnership agreement say about spouses/divorce/equity stakes?  Is the company even solvent or is it laden with debt? What is the book value of the company? Is the company or any of its managing members being investigated or likely to be investigated for business fraud that potentially could ruin the reputation and goodwill and bottom line of the company?

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 Spouses of billionaire business-people need to be particularly concerned with this issue of fraud. Billionaire Allen Stanford is currently holed up in a federal prison in Texas for running a ponzi scheme that spanned several countries and continents, including the Caribbean, US and Europe. This is a major fall for a man who once owned his own private island, a fleet of airplanes and was even knighted (vicariously) by the Queen of England. At the time of his arrest for fraudulent business dealing, Mr. Stanford was in the midst of divorce proceedings with his wife Susan Stanford and Susan was asking for a truck load of assets in settlement, including condominiums, cash and fancy cars. Now that all of his assets have been seized by the government, Mrs. Stanford was forced to sue her divorce lawyers for malpractice for failure to convey a settlement offer to her that her husband had allegedly made to her lawyers. She is asking for $200 million dollars in a pending lawsuit.

 When billionaire Walter Forbes divorced his wife Caren after 27 years of marriage, she thought she’d get away with a huge payout that included an 11,000 square foot mansion in New Canaan, Connecticut, jewelry, condos and cash. But Mr. Forbes was convicted of a massive accounting fraud last year and was sentenced to 12 years in prison for his crimes. The feds went to court to have the divorce judgment vacated so that Caren would be forced to return all the goodies she got in the settlement. The idea was that neither Forbes nor his wife should benefit from his fraudulent business dealings.
Another spouse of a high networth businessman who got caught up in the fray of fraudulent business dealings is Janet Walsh Schaberg. Her husband Stephen Walsh was arrested and charged with securities fraud among other things. At issue was a $3 million dollar condo that Ms. Walsh had received as a divorce settlement. There was some suggestion that if the money used to buy the condo were “fruits of the poisonous tree” that the ex Mrs. Walsh would have to return the condo to the feds, even though the divorce settlement pre-dated the fraud charges by several years.

 Billionaire Steven Cohen and wife Patricia Cohen are back in court nearly two decades after their divorce. The ex-Mrs. Cohen is claiming that back in the 1980’s when they settled their divorce, her husband hid business assets from her (assets he acquired through her alleged fraudulent insider trading activities). Ms. Cohen is bringing her case in federal court, not civil court, and while she is not asking to “set aside” the divorce judgment, she is seeking restitution for monies she felt she was entitled to, but that was fraudulently hidden from her. If successful, Mr. Cohen may find himself having to transfer ownership of his beloved flagship mega mansion in Greenwich to his estranged wife.

Copyright 2010 by Divorce Saloon. All rights reserved

 Spouses of billionaire business men need to be concerned about whether their settlement agreements are worth the paper it is printed on, and also, whether their settlement agreement could later be set aside due to fraudulent business dealings of their husbands (or wives as the case may be.) In many recent instances, wives have been in danger of having their settlement agreements voided when, under RICO (the anti-racketeering statute) the court orders forfeiture and restitution to cheated investors. In none of the cases did the spouses walk away completely empty handed (even Ruth Madoff got close to $2 million dollars) but the level of poshness will definitely dissipate if fraudulent business dealings are uncovered.
So the conclusion here is to first of all, billionaires and high networth individuals should use prenups and post nups to avoid having to battle over business assets. Barring that, eschew the public litigation model in favor of a mediated solution to any disputes. Also, don’t bite off your nose to spite your face. And keep an eye out for issues involving fraud which can come back to bite decades after the divorce settlement agreement is signed. Consider getting divorce insurance on settlement agreements in those cases where there is a possibility that fraud could be an issue, and the courts could order forfeiture and restitution.
Read part one: Get a Prenup
Read part two: Get a Post nup
Coming up next, Mediation for divorcing billionaires and high net worth individuals
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