Spousal Consent

How is Spousal Consent Relevant?

You may not be aware that marriage creates certain rights of a spouse or domestic partner in community property. Community property is defined in various subject areas of the California statues. California Probate Code § 3002 states:

“Community property” means community real property and community personal property, including, but not limited to, a community property business that is or was under the primary management and control of one of the spouses.

Prob. Code, § 3002

Because California is a community property state, spouses and registered domestic partners are not only partners in their relationships; they are also most likely a required third party to many business transactions.

Purchasing a business, transferring a business interest, or forming a new business partnership or entity, whether with a business partner or with another company, creates many opportunities.  However, it also requires delicate attention to details regarding the protection of the business entity and the business interests (whether in the form of shares, partnership interests, or membership units).  Another important and often hidden detail to address is the personal interests of the business partner or owner of the business interests being acquired or transferred. While business partners/members typically (or hopefully) want to do business with one another, they often bristle at the idea of having to run the business with a spouse or partner of an owner. If the community property interest of the spouse or domestic partner is not addressed in writing signed by the spouse or domestic partner, the business interest you acquire could force you to do just that.

Considering Purchasing a Business?

When considering the purchase of a business, whether it’s assets, shares, membership units or a combination of those interests, you must be certain that you are buying and acquiring all of the right, title and interest in each asset, free from liens and also free from the claims of a spouse or a registered domestic partner. Likewise, when you form a business with your business buddy, or buy into a business as a member contributing capital, the business and the other members or shareholders will likely want protection from the claims or interests of a spouse or registered domestic partner.

Business interests may be community property regardless of how title to the interests is held. Depending on the State of registration of the business and the State(s) of the domiciles of the parties involved in such a transaction, community property laws affecting the ownership status of the interests being transferred can be unknown and complex with burdens of overcoming characterization presumptions created based on the timing of a transaction and the title of the interest.

Is there a Consent Agreement?

To help resolve these uncertainties and maintain security for the parties and the business entity, a spousal or registered domestic partner Consent Agreement can and likely should be negotiated and executed. The Consent Agreement serves to evidence the nature of the business interest as either separate property, or to confirm that the spouse or registered domestic partner is consenting to the agreement but will have no role in the management or operations of the business.  The transferring party can only transfer that which the party owns free and clear of a claim of a community interest. The spousal consent document can and should be utilized to memorialize the stated goals of the parties in at least the following scenarios:

• Buyer of a business interest to receive the interest free and clear;
• Capital contribution in exchange for equity for the interest to be free and clear from any claim of community interest;
• Buy-Sell Agreements for shares of stock;
• Operating Agreements for LLCs for capital contributions or for membership interests;
• Membership Interest Purchase Agreements;
• Asset transfers;
• Mergers and Acquisitions;
• Real Estate Transactions; or
• Promissory note where the Lender requires Borrower’s spousal or registered domestic partner’s consent to cover any community property interest in the Borrower’s assets.

Need professional help?

Without spousal consent, you could end up with a surprise partner like this!

If you have a question on whether spousal consent is necessary or advisable, please contact Kelly A. Stone or give our business transactions team a call at (805) 934-4600 for guidance on a business purchase or other business transaction.

The information provided herein is not legal advice for your unique situation; instead all information, content, and materials are for general informational purposes only. Neither this website nor this post are intended to create an attorney-client relationship.