A Business Partner's Divorce in Minnesota: Your Risks

What Can a Divorcing Partner’s Spouse Claim in a Minnesota Business?

The spouse can claim a share of the marital value of your partner’s interest, not a direct claim against the company. An interest your partner acquired during the marriage is presumed to be marital property even if only your partner’s name is on the ownership records. The divorce court then divides marital property between the two spouses.

Minn. Stat. § 518.003, subd. 3b, states: “All property acquired by either spouse subsequent to the marriage and before the valuation date is presumed to be marital property regardless of whether title is held individually or by the spouses in a form of co-ownership such as joint tenancy, tenancy in common, tenancy by the entirety, or community property.” The same subdivision says “The presumption of marital property is overcome by a showing that the property is nonmarital property.” Nonmarital property includes property that “is acquired before the marriage” and a gift or inheritance “made by a third party to one but not to the other spouse.” Under Minn. Stat. § 518.58, subd. 2, if either spouse’s “resources or property” are “so inadequate as to work an unfair hardship,” the court may also “apportion up to one-half of the property otherwise excluded under section 518.003, subdivision 3b, clauses (a) to (d), to prevent the unfair hardship.”

Minn. Stat. § 518.58, subd. 1, then directs that “the court shall make a just and equitable division of the marital property of the parties without regard to marital misconduct, after making findings regarding the division of the property.” Your company feels it through what happens to your partner’s interest and through requests for company records.

How Does a Minnesota Divorce Court Divide a Co-Owner’s Interest?

The court values your partner’s interest as of a set date and then decides how to divide that value between the spouses. In one Minnesota Supreme Court case, the decree let the owner keep all of his stock and ordered him to pay his wife cash for her share. That structure left the company’s ownership unchanged.

The case is Rogers v. Rogers, 296 N.W.2d 849 (Minn. 1980). The husband owned 85% of an engineering services corporation, and a manager owned the other 15% under a buy-sell agreement. The decree awarded the husband “all right, title to, and interest in” his 85% interest and ordered a cash property settlement to the wife. The Supreme Court reversed and remanded for more specific findings on value.

The valuation date is set by statute. Under § 518.58, subd. 1, “The court shall value marital assets for purposes of division between the parties as of the day of the initially scheduled prehearing settlement conference, unless a different date is agreed upon by the parties, or unless the court makes specific findings that another date of valuation is fair and equitable.” The same subdivision adds: “If there is a substantial change in value of an asset between the date of valuation and the final distribution, the court may adjust the valuation of that asset as necessary to effect an equitable distribution.”

Rogers also limited how an owner’s business is valued for division. The court wrote that the property acquired during the marriage “should be limited to that portion of the value of RFA that is not dependent upon appellant’s continued services.” A later decision, Gill v. Gill, 919 N.W.2d 297 (Minn. 2018), calls Rogers “a valuation case, unrelated to classifying property as marital or nonmarital property.” For a company with a working owner, that keeps the owner’s future paychecks out of the business value the spouses divide.

How Does a Buy-Sell Price Affect the Divorce Valuation?

A buy-sell agreement’s price is a factor in a Minnesota divorce valuation. In Rogers, the price did not control for an 85% owner who could press the other shareholder to change the agreement. A later Court of Appeals decision upheld a value at the agreement price for a 15% owner, with no evidence that the agreement could be modified. In Rogers, the Supreme Court held the trial court “was not required to accept the current purchase price of $254,000 established by the buy-sell agreement as dispositive.” It added that “the buy-sell agreement cannot be completely ignored.”

The court gave three reasons the agreement price was not dispositive. First, the husband was the controlling owner, and the court noted that “as 85% owner and president of RFA, he could exert substantial influence over the other shareholder to assent to a modification of the agreement.” Second, “because of the Subchapter S status, the agreement price formula will in all probability undervalue the stock.” Third, “if RFA were to sell its business for cash, the corporation could be dissolved and appellant’s return on his stock would reflect the actual value of his interest, without the artificial limits imposed by the buy-sell agreement.” The Supreme Court then wrote that it “would be more appropriate, we believe, to make a present award to respondent of her share of the $254,000 purchase price set by the buy-sell agreement.” It added: “The decree could then provide for a future adjustment in the award to augment respondent’s share if appellant lives out his expected working life, or if he sells RFA or modifies the buy-sell agreement.”

In Marriage of Petterson v. Petterson, 366 N.W.2d 685 (Minn. Ct. App. 1985), where the husband had “a minority, 15 percent interest” and “there was no evidence before the trial court that the buy-sell agreement could be modified,” the Court of Appeals concluded “that the trial court properly found that David’s interest in Art-O-Graph had a net value of $45,000, the price set by the buy-sell agreement less an outstanding promissory note.”

For you, the gap matters if your partner holds control, as the owner in Rogers did. Then a divorce value above your agreement’s price can leave your partner owing the spouse more than your partner could receive by selling under the agreement. That may lead your partner to ask the other owners to change the formula or to buy more of the interest. The formula itself is a drafting choice, discussed in buy-sell agreements for Minnesota LLCs.

A different rule applies when owners sue each other. Under Minn. Stat. § 302A.751, subd. 2, a shareholder’s lawsuit involving a corporation that is not publicly held can end in a court-ordered buyout. That requires proof of one or more of the grounds in subdivision 1, clause (b), and a finding that the order “would be fair and equitable to all parties under all of the circumstances of the case.” If the shares are subject to a purchase agreement, “the court shall order the sale for the price and on the terms set forth in them, unless the court determines that the price or terms are unreasonable under all the circumstances of the case.” Subdivision 3a adds that written agreements among shareholders, “including employment agreements and buy-sell agreements,” are “presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements.” That presumption belongs to a court-ordered buyout under section 302A.751, not to the divorce case.

What Happens if the Spouse Is Awarded Part of an LLC Interest?

A spouse who receives part of your partner’s LLC interest gets your partner’s right to distributions on that part, not a vote or access to the books. The spouse becomes a member only through a route the statute lists, such as the operating agreement’s terms or the consent of all the members.

The LLC statute defines a transfer broadly. Under Minn. Stat. § 322C.0102, subd. 27, “‘Transfer’ includes an assignment, conveyance, deed, bill of sale, lease, mortgage, security interest, encumbrance, gift, and transfer by operation of law.” Minn. Stat. § 322C.0502 then sets what a transferee receives:

• Distributions. Under subd. 2, “A transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.”
• No management. Under subd. 1, a transfer does not entitle the transferee to “participate in the management or conduct of the company’s activities.”
• No records. Under subd. 1, a transfer also does not entitle the transferee, “except as otherwise provided in subdivision 3,” to “have access to records or other information concerning the company’s activities.” Subdivision 3 provides: “In a dissolution and winding up of a limited liability company, a transferee is entitled to an account of the company’s transactions only from the date of dissolution.” Separately, Minn. Stat. § 322C.0410, subd. 6, states “The rights under this section do not extend to a person as transferee.”
• Notice to the company. Under § 322C.0502, subd. 5, “A limited liability company need not give effect to a transferee’s rights under this section until the company has notice of the transfer.”

By default, your partner keeps the vote. Under § 322C.0502, subd. 7, apart from one expulsion rule, “the transferor retains the rights of a member other than the interest in distributions transferred and retains all duties and obligations of a member.” The spouse becomes a member only by a route in Minn. Stat. § 322C.0401, subd. 4, including “as provided in the operating agreement” or “with the consent of all the members.” Your operating agreement can change that default, because under Minn. Stat. § 322C.0602 a member is dissociated when “an event stated in the operating agreement as causing the person’s dissociation occurs” or when “the person is expelled as a member pursuant to the operating agreement.”

Your operating agreement’s transfer restriction adds a layer. Under § 322C.0502, subd. 6, “A transfer of a transferable interest in violation of a restriction on transfer contained in the operating agreement is ineffective as to a person having notice of the restriction at the time of transfer.” If your partner transfers the entire interest, § 322C.0602, clause (4), lets the other members expel your partner “by the unanimous consent of the other members,” with exceptions for a transfer for security purposes and an unforeclosed charging order.

A general partnership follows a similar rule on management and records, with one added right for the transferee. Under Minn. Stat. § 323A.0503, a transferee may not “participate in the management or conduct of the partnership business” or “inspect or copy the partnership books or records” during the partnership’s continuance. The same section gives a partnership transferee a right “to seek under section 323A.0801(6), a judicial determination that it is equitable to wind up the partnership business.”

How Do Transfer Restrictions Work for Corporation Shares?

In a Minnesota corporation, a written share transfer restriction binds a spouse who receives shares if the restriction is not manifestly unreasonable and is properly noted. Under Minn. Stat. § 302A.429, subd. 1, though, “A restriction is not binding with respect to securities issued prior to the adoption of the restriction, unless the holders of those securities are parties to the agreement or voted in favor of the restriction.” A restriction noted on the certificate, or sent to holders of uncertificated shares, is enforceable against a transferee. An unnoted restriction binds only a person who knew of it.

Under § 302A.429, subd. 2, a written restriction that is “not manifestly unreasonable under the circumstances” and properly noted “is valid and specifically enforceable against the holder of the restricted securities or a successor or transferee of the holder, including a pledgee or a legal representative.” The same subdivision warns: “Unless noted conspicuously on the face or back of the certificate or included in information sent to the holders of uncertificated shares in accordance with section 302A.417, subdivision 7, a restriction, even though permitted by this section, is ineffective against a person without knowledge of the restriction.”

If the spouse does become a shareholder, the spouse gains a shareholder’s information rights. Minn. Stat. § 302A.461, subd. 4, gives a shareholder or beneficial owner of a corporation that is not publicly held “an absolute right, upon written demand” to examine and copy two sets of records at any reasonable time. They are the share register and the documents listed in subdivision 2, which “the corporation shall make available within ten days after receipt by an officer of the corporation of the written demand.” Minn. Stat. § 302A.011, subd. 41, deems a person the beneficial owner of shares beneficially owned by a “spouse of the person . . . residing in the home of the person.” I suggest treating a written demand from a spouse who still lives with your partner as one that may require an answer, because that spouse may count as a beneficial owner. Under § 302A.461, other corporate records are available “only if the shareholder, beneficial owner, or holder of a voting trust certificate demonstrates a proper purpose for the examination.” Those shareholder inspection rights are one reason a clear, noted restriction is worth checking now.

What Records Can the Spouse’s Attorney Demand From the Company?

The spouse’s attorney can serve your company with a subpoena for designated business records, even though the company is not a party to the divorce. The company may object in writing, and after an objection the records come out only on a court order. Confidential commercial information can be protected by the court.

Minnesota’s family court rules apply the civil rules “where applicable.” Minn. Gen. R. Prac. 301.01 states that the civil rules “shall apply to Family Law actions except where they are in conflict with applicable statutes or the Expedited Child Support Process Rules.” Under Minn. R. Civ. P. 45.01, a subpoena may command a person to “produce and permit inspection, copying, testing, or sampling of designated books, documents, electronically stored information, or tangible things in the possession, custody or control of that person.”

I suggest checking the form of any subpoena that arrives, because the rule lists what it must contain. A subpoena must “state the title of the action, the name of the court in which it is pending, and its court file number, if one has been assigned.” It must also tell you of your right to reimbursement of certain expenses. Under Minn. R. Civ. P. 45.01, “Any use of a subpoena, other than to compel attendance at a trial, without prior notice to all parties to the action, is improper and may subject the party or attorney issuing it, or on whose behalf it was issued, to sanctions.” Your partner, as a party, should therefore have received notice.

Under Minn. R. Civ. P. 45.03, the company “may, within 14 days after service of the subpoena or before the time specified for compliance if such time is less than 14 days after service, serve upon the party or attorney designated in the subpoena written objection to producing any or all of the designated materials.” Check the current text of the rule before relying on these periods. Minn. R. Civ. P. 45.03 continues: “If objection is made, the party serving the subpoena shall not be entitled to inspect, copy, test, or sample the materials or inspect the premises except pursuant to an order of the court by which the subpoena was issued.”

Two more protections apply. Under Minn. R. Civ. P. 45.03, if a subpoena “requires disclosure of a trade secret or other confidential research, development, or commercial information,” the court “may, to protect a person subject to or affected by the subpoena, quash or modify the subpoena or, if the party in whose behalf the subpoena is issued shows a substantial need for the testimony or material that cannot be otherwise met without undue hardship and assures that the person to whom the subpoena is addressed will be reasonably compensated, the court may order appearance or production only upon specified conditions.” Subject to Rules 26.02 and 26.03, Minn. R. Civ. P. 45.03 also provides that a nonparty producing records of its business “is entitled to reasonable compensation for the time and expense involved in preparing for and giving such testimony or producing such documents.”

Your partner may also ask the company for records as a member. In a member-managed LLC, under § 322C.0410, subd. 1, a member may, on reasonable notice, inspect company records “to the extent the information is material to the member’s rights and duties under the operating agreement or this chapter.” The same subdivision requires the company to furnish each member, “without demand, any information concerning the company’s activities, financial condition, and other circumstances which the company knows and is material to the proper exercise of the member’s rights and duties under the operating agreement or this chapter, except to the extent the company can establish that it reasonably believes the member already knows the information.” It also requires the company to furnish, “on demand, any other information concerning the company’s activities, financial condition, and other circumstances, except to the extent the demand or information demanded is unreasonable or otherwise improper under the circumstances.” Under clause (3), “The duty to furnish information under clause (2) also applies to each member to the extent the member knows any of the information described in clause (2).” In a manager-managed or board-managed LLC, subd. 2 lets a member obtain information if “the member seeks the information for a purpose material to the member’s interest as a member,” makes “a demand in a record received by the company,” and seeks information “directly connected to the member’s purpose.” The company then has a duty: “Within ten days after receiving a demand pursuant to clause (2), item (ii), the company shall in a record inform the member that made the demand” of what it will provide and, for anything withheld, “the company’s reasons for declining.” Subdivision 2, clause (4), adds: “Whenever this chapter or an operating agreement provides for a member to give or withhold consent to a matter, before the consent is given or withheld, the company shall, without demand, provide the member with all information that is known to the company and is material to the member’s decision.” In either kind of LLC, § 322C.0410, subd. 7, lets the company “impose reasonable restrictions and conditions on access to and use of information to be furnished under this section, including designating information confidential and imposing nondisclosure and safeguarding obligations on the recipient.” The company carries the burden of proving a restriction reasonable.

What Are the Other Owners’ Options During a Partner’s Divorce?

The other owners can talk with the divorcing partner, stay out of the case, enforce the transfer restrictions, buy all or part of the interest, or amend the agreement. Each fits a different situation and carries its own risk. Several of these options need your partner’s cooperation, because your partner keeps a member’s or shareholder’s vote unless an exception applies. In an LLC, the exceptions include an operating agreement that provides for your partner’s dissociation or expulsion, and expulsion by the other members under § 322C.0602, clause (4), after your partner transfers the entire interest.

1. Talk with your partner first. An owner-to-owner conversation can come first in any of these situations. I suggest asking what outcome your partner expects and whether your partner plans to keep the whole interest. I also suggest asking how any payment to the spouse will be funded, because those answers show whether ownership or cash flow may change. The risk is low. I suggest keeping the conversation on the company’s interests, because your partner’s divorce strategy belongs to your partner and the partner’s attorney.
2. Stay out of the divorce. This fits when your agreement has clear, noted transfer restrictions. The company responds only to formal requests such as a subpoena. The risk, if your partner holds control as the owner in Rogers did, is that a valuation above your buy-sell price may later press your partner for cash.
3. Enforce the transfer restrictions. This fits when a decree or settlement could move part of the interest to the spouse. Because a violating LLC transfer is ineffective under § 322C.0502, subd. 6, against a person “having notice of the restriction at the time of transfer,” I suggest sending the restriction to both spouses’ attorneys before any decree. The risk is friction with your partner, so I suggest telling your partner first.
4. Buy all or part of the interest. This fits when your partner wants out or needs cash to pay the spouse. A buyout of a co-owner is a business divorce of its own, with its own pricing and payment terms. The risk is timing, covered in the buyout question below. If your partner later fails to pay the spouse’s award, the spouse may seek a charging order under Minn. Stat. § 322C.0503, also covered in the questions below.
5. Amend the agreement. This fits when the current agreement has no transfer limits or an outdated price formula. In an LLC, the operating agreement sets “the means and conditions for amending the operating agreement” under Minn. Stat. § 322C.0110, subd. 1. If it is silent, Minn. Stat. § 322C.0407, subd. 2, provides that “The operating agreement may be amended only with the consent of all members,” and subd. 3 requires the consent of all members to “amend the operating agreement” in a manager-managed company. In a corporation, a new restriction reaches your partner’s existing shares only with your partner’s signature or vote under § 302A.429, subd. 1.

An amendment or buyout made while the divorce is pending can draw the spouse’s attention. Under § 518.58, subd. 1a, if a spouse, “without consent of the other party, has in contemplation of commencing, or during the pendency of, the current dissolution, separation, or annulment proceeding,” “transferred, encumbered, concealed, or disposed of marital assets except in the usual course of business or for the necessities of life, the court shall compensate the other party by placing both parties in the same position that they would have been in had the transfer, encumbrance, concealment, or disposal not occurred.” That compensation rule runs between the spouses.

A restraint can also bar your partner’s side of the deal. Under Minn. Stat. § 518.091, subd. 1, “Upon service of the summons, the restraining provisions contained in the notice apply by operation of law upon both parties until modified by further order of the court or dismissal of the proceeding, unless more than one year has passed since the last document was filed with the court.” The first provision reads: “NEITHER PARTY MAY DISPOSE OF ANY ASSETS EXCEPT (i) FOR THE NECESSITIES OF LIFE OR FOR THE NECESSARY GENERATION OF INCOME OR PRESERVATION OF ASSETS, (ii) BY AN AGREEMENT IN WRITING, OR (iii) FOR RETAINING COUNSEL TO CARRY ON OR TO CONTEST THIS PROCEEDING.” While the case is pending, Minn. Stat. § 518.131, subd. 1, also lets the divorce court grant a temporary order to “Restrain one or both parties from transferring, encumbering, concealing, or disposing of property except in the usual course of business or for the necessities of life.” Under Minn. R. Civ. P. 65.04, which Minn. Gen. R. Prac. 301.01 applies in family cases “as to matters not addressed” by the family court rules, a restraining order also binds “those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise.” I suggest asking your partner whether any restraint or restraining order applies before signing a buyout or amendment, because the rule reaches a person acting in concert with a restrained party after notice. I also suggest recording the business reason for any change made during the divorce, because the spouse’s attorney may ask for it.

Protecting the Company During a Co-Owner’s Divorce

A business partner’s divorce in Minnesota reaches your company through your partner’s interest and through requests for records. The spouse’s claim is to marital value and, if the court finds an unfair hardship, up to one-half of certain nonmarital property. What the spouse can hold, vote, or read depends on your entity’s statute, on your written restrictions, and on whether the spouse had notice of them. Reading your operating or shareholder agreement now, before a decree or settlement, shows which of these protections you already have.

Owner conflicts that start in a partner’s divorce can grow into a Minnesota shareholder dispute. If your business partner is divorcing and you want to know how your agreement applies to the spouse’s claim, email [email protected] with a brief description. I can then start an intake and conflict check before you send any agreement or other documents.