I generally try to avoid the voyeuristic rubber-necking of celebrity divorce gossip. But after making my way through the 80-page Order issued last week in the divorce of Continental Resources CEO Harold Hamm from his wife Sue Ann, I was struck by the extent to which the issues were really just a magnification (albeit a $14 billion one) of those faced by many professional couples. In that spirit, I thought I’d offer my top “Five Lessons We Can All Learn from Harold Hamm’s Divorce.”
1. Growing Your Marital Garden
For those who haven’t been following the Hamm case, Harold is the founder and CEO of Continental Resources, an oil drilling giant that he founded long before his 1988 marriage to wife Sue Ann. Upon divorce, the chief issue isn’t whether Harold’s shares of Continental Resources owned prior to his marriage are non-marital–they are–but how to treat the multi-billion dollar growth on those shares during his 26 year marriage.
Oklahoma, like Minnesota, distinguishes between growth on non-marital assets that is “passive” (i.e. due solely to market forces) and “active” (due to the personal efforts of a spouse). Passive growth is simply part and parcel of the non-marital asset and is returned to the spouse to whom the non-marital asset belongs. Active growth, by contrast, is treated as an asset of the marriage and subject to division. While the distinction seems straight forward when the asset in question is cash or securities, it’s quite a bit more complicated when one spouse brings a business into the marriage.
Minnesota’s leading case on the subject illustrated the point this way:
There can be little doubt that more than 35 years of essentially prosperous and mildly inflationary economic conditions provided a favorable climate in which a budding business could grow and flower. But a business, like a garden, must be tended if it is to flourish. The economic life of the [original business assets] has long since ended; and were it not for the personal efforts contributed by the spouses, the investment would have withered and died with [those assets]. What [Husband] really invested in was the opportunity to turn his talents toward the development of an enterprise in which he had a personal stake.
Nardini v. Nardini, 414 N.W.2d 184 (Minn. 1987).
This was essentially the question that got tried for nine weeks in the Hamms’ case: what caused the multi-billion dollar growth in Continental Resources since 1988? Harold Hamm’s extraordinary contributions and leadership (active growth), or macro economic forces outside Harold’s control (passive growth)?
The answer is most certainly “both,” but it was the job of Sue Ann’s legal team to demonstrate how truly spectacular Harold was, at the same time that Harold’s lawyers portrayed him as lucky, well-advised, and at times an active hinderance to his company’s growth. Sue Ann brought in several experts who compared Continental Resources’ performance against similar oil companies and the market more broadly, all of whom concluded (no surprise) that Harold had vastly out-performed both.
The trial court was ultimately persuaded that about $1.4 billion in Continental’s growth was “martial” (attributable to Harold), and ordered Harold to pay a $995 million (after accounting for other assets), leaving Harold with the overwhelming majority of his fortune.
The lesson: Know if you’re growing your marital garden. If one spouse will be devoting her efforts to growing or conserving non-marital property (her own or her spouse’s), be sure to plan ahead for how those efforts will be treated. Will one spouse be managing non-marital investments? Working in a pre-marital business? Abandoning a successful career because the other partner is brining substantial funds into the marriage? If you’re not growing your marital garden, 1/14th of your spouse’s estate likely won’t go as far as Sue Ann’s $1 billion award. Likewise, if you’re concerned with paying out money you thought was “just yours,” planning ahead is an important first step.
2. Taxes Matter
Robert Woods, a tax attorney and Forbes.com contributor, made some great points on the tax implications of the Hamm’s property settlement, my favorite being this:
If the Hamms had divvied up shares, think about tax basis. Mr. Hamm founded Continental Resources in 1967, so his tax basis is likely tiny. If Mrs. Hamm ended up with stock and sells it, she alone is taxable on a whopping gain. If the Hamms divide cash, securities, and houses, with a mixture of high and low bases, each spouse could take some of each. That way the future tax burden will be equalized. But that’s tough if most of the value is in the shares and if they are highly appreciated.
While Woods was right to make this point, the Oklahoma Court didn’t seem to appreciate the substantial tax impact that an award of stock could have on Sue Ann. In paragraph 405 of its order, the Court ordered Harold to make “payment…in cash or cash equivalent or by transferring stock or securities from [Harold’s] to [Sue Ann’s] account. The credit for stock or securities shall be the value of the stock or securities at the time of transfer.”
In other words, Harold can pay Sue Ann substantially less than her $995 million (at least after accounting for taxes) by transferring Sue Ann his securities with the lowest basis. Sure, she’ll still have securities worth almost a billion dollars, but she’ll also be sitting on a substantial tax bill in the event she ever sells. Hardly the “equivalent” of cash.
The lesson: Taxes Matter. Ask about basis and future tax-implications when assets–particularly assets that have been held for a long time–are being divided. Don’t get stuck with an under-valued property award because you owe a hefty bill to Uncle Sam.
3. Disappearing Alimony Awards
Sue Ann had also requested ongoing alimony from Harold, perhaps not unsurprising given his substantial income. But it wasn’t to be. In an Order with over 420 paragraphs, the Court took only one to dismiss the alimony request.
While this may be understandable where Sue Ann just became a billionaire, far less affluent spouses are being expected to live off their assets (including spending down principal) rather than receiving on-going support. In a recent case out of Delaware, the Supreme Court expected Wife (whose earned income totaled less than $17,000 per year) to spend down her $500,000 inheritance rather than receive spousal maintenance from her ex-Husband.
The lesson: Assets and Alimony don’t Mix. If income from your assets (or sometimes even your assets themselves) can support you without alimony, ongoing support from a spouse may not be in the picture.
4. Divorce for Business Owners
Leading up to trial, many pundits and industry bloggers were concerned that a large pay-out would endanger Hamm’s status as Continental’s majority shareholder (as he sold shares to pay off a large property settlement). The concern was apparently so great that Continental’s lead attorney sat through the entirety of the 9 -week trial.
Divorce is hard on anyone, and for a business owner it can be particularly hard. Extensive document productions, business valuations, tracking down information from years ago you thought you’d never need. And because a business is often both the most valuable asset and the primary source of income, the stakes are even higher. The stress can be so intense that I’ve written before about a suggestion that CEOs be required to disclose any ongoing divorce proceedings to stock holders.
The lesson: Divorce Quietly. Whether you’re the CEO of a Fortune 100 company or a small business owner (or the spouse of either), sometimes discretion is the better part of valor. Airing dirty laundry in Court can not only be bad for you, it can be bad for business. To borrow a line from the Daily Beast’s Vicky Ward (@VickyPJWard): “It’s a simple equation. Scandal equals reputational, emotional and financial ruin—for all concerned.” Don’t believe me? Ask Janice Schacter, ex-wife of a BigLaw partner who received substantially less upon divorce because her complaints contributed to a decline in her ex-husband’s business.
So, goose, golden egg, and all that.
5. The Importance of Planning
But throughout the entirety of the Hamm case, the most remarkable thing about the case was that Harold and Sue Ann, despite having a substantial net worth even when they married, never bothered to get a prenup. They never made a plan. And thus, when their marriage broke down, they had to default to the “prenup” created for them by the state of Oklahoma: its divorce laws. I suspect neither Harold nor Sue Ann feel particularly satisfied with that plan. (Sue Ann is, after all, appealing.)
The lesson: MAKE A PLAN. Call it a prenup, call it a marriage plan, call it whatever you want. But if you don’t make a plan, your state’s divorce laws already have one waiting for you.
Image Credit: David Shankbone (Own work) [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons