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Ext. PublicationWhy Contractual Terms Outweigh Statutory Defaults in Divorce Business Valuation
Forensics, Litigation & Valuation Services
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Business valuation professionals routinely encounter cases where the division of business interests in a divorce is presumed to follow statutory law. However, the recent Arizona Court of Appeals decision In re S.R.W. is a powerful reminder that contractual terms, especially those found in premarital agreements and entity operating agreements, can override statutory defaults and fundamentally alter the outcome.
Understanding the Case in Point: In re S.R.W.
In this case, the parties entered marriage with a comprehensive premarital agreement (PMA) that expressly ignored Arizona’s community property laws. Years later, the husband and wife formed two limited liability companies (LLCs), each governed by detailed operating agreements. Following their divorce, the wife asserted she was entitled to 50% of the LLCs’ total assets, relying on her “ownership percentage” and applicable statutory presumptions regarding community property.
The court rejected this approach, focusing instead on the PMA and the LLC operating agreements that:
- Defined each party’s interest in terms of their capital account, not a blanket percentage of all assets
- Set forth specific dissolution procedures, including how profits, losses and distributions would be allocated
Ultimately, the wife’s interest was limited to the value of her capital account ($178,053,000) rather than half of the LLCs’ total value.
Key Takeaways for Law Firms and Their Valuation Experts
1. Contractual terms may supersede statutory defaults: The S.R.W. decision demonstrates that the parties’ agreements may control the characterization and division of business ownership interests, even in divorce. As such, statutory presumptions, such as equal division of marital property, may be rendered inapplicable.
Practice tip: Before retaining a valuation expert, it’s important to carefully review and fully understand all relevant agreements, including premarital agreements and LLC operating agreements, as they may override default statutory provisions. One should not assume that statutory law will govern the outcome.
2. Economic interest does not equal ownership percentage: The court drew a clear distinction between a members’ stated ownership percentage and their substantive economic interest. In S.R.W., the LLC operating agreements directed that profits and losses be allocated to each member’s capital account and required that dissolution proceeds be distributed based on those accounts rather than the percentages reflected in a separate ownership exhibit.
Practice tip: Work closely with your valuation professionals to analyze the operative documents and determine what the ownership percentage means. Is it a share of profits/losses, voting rights or a claim on underlying assets? The valuation must reflect the economic reality, not just the labels.
3. Valuation methodology must align with agreements: The court favored the valuation expert who anchored his analysis in the LLC agreements and financial records. The opposing expert, who assumed a 50% interest in all assets, was rejected because his approach conflicted with the contractual terms.
Practice tip: Select valuation experts who base their methodology on controlling agreements and can clearly explain and defend their approach considering the specific provisions that govern the business interest.
Conclusion: The Imperative of Careful Document Review
In re S.R.W. reinforces a fundamental principle in dispute-related business valuations: contractual terms often govern and may override default statutory presumptions. For attorneys and valuation professionals alike, a thorough review and clear understanding of all relevant agreements — including operating and shareholder agreements, premarital agreements and financial records — is not merely best practice. Rather, it is essential. Overlooking these documents may lead to flawed assumptions, unreliable valuations and ultimately, unfavorable outcomes.
Weaver’s forensics and litigation team frequently works with complex agreements, capital structures and disputed valuation scenarios. Contact us. We can help evaluate governing documents, analyze economic interests and provide defensible valuation support in high-stakes divorce and business litigation matters.
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