By Samantha Guido
Shareholders in a closely held corporation, especially those who are minority shareholders, may believe that the financial affairs of their business are off limits in a divorce case. However, discovery in New York civil actions, including divorce actions, is guided by the principal of full disclosure of all matter material and necessary to the action. In other words, if the documents sought are relevant to the matrimonial case, they will need to be turned over to your spouse and his or her lawyer if requested. In the world of divorce, the entire financial history of the marriage is relevant and subject to discovery.
What does this mean for your closely held corporation? Generally, if a party to the divorce proceeding is a shareholder of such a corporation (even if only a minority shareholder), he or she must be prepared to disclose a fairly extensive audit of the corporation’s financial affairs. This type of disclosure is designed to enable one spouse to meaningfully evaluate the value of the other’s corporate interests.
This rule does not necessarily apply if you are a CEO or president of a closely held corporation, but not a shareholder. In those circumstances, disclosure may be mandated, but will likely be less expansive. For example, under New York law, a CEO may be required to produce certain documents within their possession and control, such as agreements to which they are a party and documents relating to fringe benefits or expenses incurred by the CEO but paid for by the corporation.
What happens if a corporate shareholder refuses to produce corporate records to his or her spouse? Generally, a spouse can obtain relevant financial records directly from the corporation by serving it with a nonparty subpoena. However, when a party is a corporate officer but not a shareholder, courts generally do not allow the issuance of non-party subpoenas to the corporation.
If you are faced with the prospect of disclosing financial records related to a closely held corporation, you should seek advice from an experienced attorney. You may be able enter into confidentiality agreement with your spouse in order to limit the ways in which financial and business records and proprietary information may be used by the parties.