How Do You Value Company Shares for Divorce?
When you are divorcing and you or your spouse runs a business or has shares in a family firm, you need to know if the business is relevant to the divorce settlement and how it will be valued.
Our North West divorce solicitors specialise in negotiating financial settlements where one or both spouses own a family business.
In this blog, we answer your questions on business assets in divorce proceedings and how you value company shares in divorce.
For expert family law advice, call our team of specialist divorce lawyers or complete our online enquiry form.
Your frequently asked questions on business assets in divorce proceedings
Divorcing couples ask these questions when they or their spouse has business assets:
- Can the divorce court decide what happens to a business?
- Will company law and the shareholder agreement determine what happens to the shares in a family business?
- Are business assets relevant to divorce proceedings?
- How are businesses valued in divorce proceedings?
- Can the company accountant value the business in divorce proceedings?
- Is the book value of a business an acceptable valuation of a business asset in divorce proceedings?
- How are minority interests in family companies valued in divorce proceedings?
- What is the relevant date to value a company shareholding?
- Can a shareholder in a family business be forced to sell their shares as part of a financial court order?
- What happens to a family business when both spouses are shareholders in a family business?
At Evolve Family Law, our family lawyers can answer all your business-related financial settlement questions, whether you own a family business or are married to someone who is either a sole trader, in partnership or a majority or minority shareholder in a family business.
Can the divorce court decide what happens to a business?
The divorce court can decide what happens to business assets in a divorce. The court will consider:
- Is the business a family asset?
- What is the value of the business?
- What is a fair financial settlement?
If the spouse’s shareholding is not classed as a family asset, the court will only include it in the financial court order if necessary to meet the needs of a spouse. If a spouse’s reasonable needs can be met without reference to the business asset, its value will be ignored.
In divorce proceedings concerning a family business, the judge can order:
- The spouse who owns the business asset retains it as part of their share of the family wealth.
- The shares in a family company are sold, and the sale proceeds are divided in the proportions ordered by the judge.
- The shares in the family company are transferred from one spouse to the other.
If one spouse is the only one actively involved in the family business, the court will normally order that the spouse retain ownership of their shares. However, the other spouse may receive all the equity in the family home, a lump sum payment, spousal maintenance, or a combination of these.
If one spouse is a minority shareholder and the other a majority shareholder, the court may order the minority shareholder to transfer their shares in the company to their spouse.
If the divorcing couple can still work together in the business and want to continue joint ownership, the court could leave both spouses with shares in the company. This scenario is unusual unless the couple asks the divorce court to make an agreed financial consent order.
Will company law and the shareholder agreement determine what happens to the shares in a family business?
Spouses sometimes assume that the divorce court lacks jurisdiction to decide what happens to a business in divorce proceedings. For example, if a husband and wife are the major and minor shareholders in a company and are in a shareholder dispute. Logically, you would assume that the dispute is a matter of corporate law. It is and it isn’t.
If one spouse starts proceedings in the commercial court under the Companies Act 2006, the judge has jurisdiction to resolve the corporate dispute. However, if the husband or wife initiates financial proceedings because they cannot reach a divorce settlement, the family court has wide-ranging discretion to make orders, including orders over business assets. Therefore, it wastes time and money for a shareholder dispute between a divorcing husband and wife to be litigated first in the commercial court using corporate law principles when the family court can decide how to divide assets, including the business, using the principles contained in Section 25 of the Matrimonial Causes Act 1973.
Are business assets relevant to divorce proceedings?
Business assets are relevant to divorce proceedings. The judge will decide if they are:
- A matrimonial or family asset, or
- A non-matrimonial or non-family asset.
If deemed a family asset, the business is relevant to the divorce settlement. If it is classed as a non-matrimonial asset, its value could be considered if it is necessary to do so to meet the reasonable needs of the spouse who does not own the business.
How are businesses valued in divorce proceedings?
Business assets must be disclosed as part of the Form E financial disclosure process.
In Form E, a spouse is asked to value their business and other assets. The other spouse may agree on the valuation. If so, an accountant doesn’t need to carry out a valuation.
A business valuation may be agreed in scenarios such as:
- The spouse works freelance and their earnings are paid into their company account. There are no valuable business assets and no goodwill value. The business is valued at the amount of cash in the bank.
- The husband and wife are shareholders in a company, and an offer for purchase has been accepted from a third party unconnected to either spouse.
In other situations, the court may be asked to order an independent valuation of a sole trader’s business, a partnership interest, or a company shareholding.
The court typically orders the instruction of a forensic joint accountant as a single joint expert. Both parties instruct the expert and agree to the terms of the letter of instruction. The court will typically specify the scope of the expert’s report, for example, whether the expert is to assess company liquidity in addition to providing a valuation.
Can the company accountant value the business in divorce proceedings?
A company accountant can provide the Form E value for the business. If additional information is necessary, the court may be persuaded that a detailed valuation by the company accountant is more appropriate than the instruction of a forensic accountant with no prior knowledge of the business.
The approach taken by the court will depend on the size and structure of the company, as well as the representations made on behalf of both spouses. For example, one spouse may claim that the majority shareholder heavily influences the company’s accountants.
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Is the book value of a business an acceptable valuation of a business asset in divorce proceedings?
The book value of a business can be an acceptable valuation for certain types of small businesses, such as a company set up by a freelancer to channel their income through, and the business has no goodwill value or significant assets.
A divorce solicitor can explain the valuation options and why you may need a more detailed valuation of your spouse’s shareholding or partnership interest.
How are minority interests in family companies valued in divorce proceedings?
If a spouse is a minority shareholder in a family business, special consideration needs to be given to the value of the shares. The shares may not be attractive to a third party, who would be buying shares in a business where they have no control or power to veto. The professional conducting the valuation will generally apply a discount to a minority shareholding, depending on the percentage shareholding and the degree of control, if any, the minority shareholder has.
The value of a minority shareholding should be examined carefully. For example, minority shareholding may not be heavily discounted in a company with significant cash reserves.
What is the relevant date to value a company shareholding?
Sometimes, spouses and their lawyers argue about the date to be used for valuing the shares in a company, as the fairness of the financial settlement may depend on the valuation date.
For example, a forensic accountant may be asked to value company shares at:
- The date of separation, and
- The date of cohabitation or marriage, and
- The date the company shares were transferred or gifted to a husband or wife.
The importance of business asset valuation dates was explored in the Court of Appeal case of Martin v Martin (Rev 1) [2018] EWCA Civ 2866.
The Martin case illustrates the complexity of valuing shares in a non-listed company. A high court judge awarded Mrs Martin 40% of the 182 million family fortune. Mrs Martin appealed, saying she should have got 50%. Mr Martin counter-appealed, arguing that his ex-wife should have received less than 40% of the assets.
The crux of the appeal was the relevance of the value of Mr Martin’s shares when the couple began to live together. The court concluded that it was fair to assess the value of the shares at the date of cohabitation and, therefore, ringfence the value of the husband’s pre-marriage-acquired shares. This resulted in Mrs Martin receiving 40% rather than an equal division of the family assets.
The court said that a financial settlement ‘’ involves a holistic, necessarily retrospective, appraisal of all the facts and then the application of a subjective conception of fairness, overlaid by a legal analysis.’’
That subjective approach makes it even more critical for spouses to seek early specialist legal advice from divorce solicitors experienced in divorces involving family businesses and in assessing what a court is likely to determine as a fair financial settlement.
Consult Evolve Family Law for advice on divorce and business assets
The specialist divorce lawyers, led by Robin Charrot, have substantial experience representing spouses, civil partners, business owners and non-business owners in financial proceedings involving businesses ranging from SMEs to listed companies.
With many years of experience advising on business assets in divorce, our team is well-equipped to hone in on the key aspects. That could be tracing vital financial disclosure, analysing company accounts or instructing a shadow accountant to assess the relevance of the transfer of business assets into a SIPP pension and leaseback at an overvalue to the company, impacting company profitability at the time of the divorce proceedings, or spotting unusual movements or discrepancies in director loan accounts. Alternatively, when acting for a majority shareholder, it could be robustly arguing against fishing expeditions for excessive financial disclosure or arguing for the instruction of the single joint expert to be limited to current issues rather than their remit extending to a historical trawl of company transactions.
At Evolve, we combine expertise with a personal touch, providing strategic advice tailored to your family and business circumstances, as well as robust court representation.
For expert family law advice, call our team of specialist divorce lawyers or complete our online enquiry form.
