Forbes Magazine

FEATURE-Divorce disclosures pose new risks for companies

Reuters, 10.27.02, 1:27 PM ET
Forbes Magazine

NEW YORK (Reuters) - Analysts and investors looking for closely held company information may opt to pass over lengthy regulatory filings and instead hit pay dirt in divorce court.

In the last two months, two major U.S. companies have been hit by embarrassing or awkward revelations that came to light in high-profile divorce cases of top executives.

An Indiana judge this month released financial details about Ernst & Young, the privately held accounting firm, during divorce proceedings of Chief Executive Richard Bobrow and his wife, Jan. Ernst's rivals are likely to pay close attention to information that came out about its capital and how it valued a consulting business.

In another case, details of former General Electric Co. CEO Jack Welch's lavish retirement package came out in a financial affidavit filed in September by his estranged wife, Jane. The revelations sparked a hail of investor criticism and led to Welch saying he would pay for the perks.

Divorce is "a risk companies have always ignored or refused to accept until recently," said Raoul Felder, a well-known divorce lawyer who represented former New York Mayor Rudolph Giuliani in his divorce from TV personality Donna Hanover.

Because marriage is a protected civil right, companies have few options for pre-empting such revelations. They cannot compel executives or their spouses to sign prenuptial or post-nuptial agreements limiting disclosure in the event of a divorce. That would be considered interference in the private contract of marriage, lawyers say.

But that does not stop many companies from fighting disclosures once a divorce is under way. During the discovery process, when a spouse's assets are being valued, some set up obstacles by asking for hearings to seal information or by appealing unfavorable decisions.

"One of the things I see them do ... is they make it very expensive to get that information. They challenge you each step of the way," said Jay Fishman, a principal in the consulting services group at investigations firm Kroll Inc.

In effect, the company may force the dependent, non-moneyed spouse "to run up fairly decent, large fees in an effort to discourage them from pursuing this angle," said Fishman, who has valued assets in the Hanover-Giuliani and Nicole Kidman-Tom Cruise divorces.

When lawyer Arnold Rutkin was representing Lorna Wendt in her 1997 divorce from Gary Wendt, who at the time was a high-ranking GE executive, "We had to work excruciatingly hard to get information," he said.

The court refused to grant Rutkin access to information regarding Wendt's severance package, a case that became famous for valuing the work of a senior executive's spouse.

But similar efforts will probably bear more fruit in the post-Enron era, with investors demanding greater corporate transparency.


Judges -- and the public -- have less tolerance for the argument that corporate information should remain secret, legal experts say.

"Generally they're less sympathetic to anybody who wants to pull the shield over them," said Felder.

In addition, Rutkin said judges don't want notoriety for keeping information sealed. "They understand now that the media and parties (in the case) are willing to go to the mat if they try to do that."

"There's an enormous tension here because what the company would be trying to do is keep information secret that the public might want to know and have good reason to know," said David Skeel, a corporate law professor at the University of Pennsylvania.

In cases where companies want to protect information -- not for competitive reasons, but simply because it might embarrass them -- the legal argument is especially weak, he said. "They're basically suggesting that we ought not be told about things they ought not have done."

The Ernst case was different -- and unusual -- because the judge allowed disclosure of information that, though not embarrassing, will be of interest to competitors, including the firm's total capital and how it valued Cap Gemini, the consulting business it sold in 2000 at a large premium.

"The court went further than I've seen courts go here," said Fishman. "It will be very interesting to see whether other courts will follow this or not."

If anything, these cases show that corporations have an interest, as Felder says, in their executives being happily married. If that doesn't work, he said, companies should consider "hiring eunuchs."

Copyright 2002, Reuters News Service