Divorce and business – can you combine the two?

Any relationship breakdown or divorce creates emotional distress and financial uncertainty.

For business owners there are very particular concerns about the impact this may have on their companies, strategically and financially.

Very often both spouses hold shares in a company to share the various tax benefits. Often one spouse has no direct role or input to the running of the business. The shares are also often held without either a shareholder’s agreement or casting vote. All of this can have significant implications.

One spouse may hold a minor role in the company for which they receive a salary. They have employee status and all the employment rights and claims that go hand in hand with that status.

The way in which a company is owned and operated can be pivotal to the financial negotiations on separation and divorce and how the family wealth should be shared.

The company will most likely have generated both income and capital wealth for the family. Company shareholdings are a capital asset to be considered; the income generated a resource to meet financial needs. All need to be independently valued to see how they should be shared or factored into settlement discussions, but it should not be forgotten that the company, if successful, is the golden goose and should be protected.

Ensuring the business owner has the freedom and ability to run the business without interference is a primary objective but very often s/he is the financially stronger in the relationship and so this must go hand in hand with assurances to operate transparently and in everyone’s best interests. Attempts to deliberately run the business into the ground or transfer assets to new companies are met with stern treatment by the courts and likely a far worse outcome than by ‘playing with a straight bat’. Remember there is a duty to provide full and frank disclosure of all financial information and there is nearly always a paper trail!

The normal approach to business valuations will be the instruction of a single joint expert accountant who will be asked to:

• value the total shareholding in a company and explain their valuation methodology (net assets, earning basis etc)
• assess liquidity
• consider tax implications associated with extracting value from the company for example by dividend or sale of shares
• the maintainable earnings of the company

It is accepted that owning shares in a company carries risk. It is common for a discount to be applied to the value of the illiquid element of any shareholding before adding it to the overall marital pot to be divided and shared within settlement discussions. It is rare for a court to order a company or shares to be sold, but this is within the extensive powers of the family courts if there are no other viable options.

Top tips:

• Always have a shareholder’s agreement whether owning with a spouse or otherwise
• Make sure someone has the casting vote
• Make sure the Articles of Association make it clear to whom shares should be transferred in the event of divorce or separation
• Always consider succession planning. Businesses are often generational and expert advice should be taken from both corporate and trusts/estates lawyers regarding future transfers between generations and tax planning
• Make sure your company paperwork is in good order and your accounts are up to date
• Make sure you have a good company accountant!
• If you are not yet married, do all of the above; if you intend to marry, get a pre-nup and ringfence your shares from future claims
• Always instruct a family lawyer who understands business, can read and interpret your accounts and understands how your business should be valued and treated within any separation discussions; this requires particular expertise.