Shareholder Disputes and Divorce

It’s bad enough to separate or divorce, but even harder to go through a shareholder dispute as well. Northwest divorce lawyers recognise that if you are in business with your husband or wife, you may face a shareholder dispute and financial proceedings over your divorce settlement.

In this article, financial solicitor Robin Charrot answers your questions on shareholder disputes with your former partner during divorce proceedings. Robin can help you reach a financial agreement over how your family assets are divided and specialises in financial settlements involving family businesses.

For expert family law advice, call our team of specialist divorce lawyers or complete our online enquiry form.

Your frequently asked questions on family businesses in financial  proceedings

Whether you own shares in a family business, jointly operate the business with your spouse, or rely on the income generated from the business without playing a part in it, you will have questions about the business if you and your spouse separate, such as:

1. Are business assets relevant to divorce proceedings?
2. What happens if business assets are not disclosed in financial proceedings?
3. What happens when spouses are shareholders in a family business?
4. Can a divorced couple agree to continue in business together?
5. Can I ringfence business assets so they are irrelevant in divorce proceedings?
6. Role of a shareholder agreement in divorce proceedings
7. Valuing a business in a shareholder dispute or divorce proceedings

At Evolve Family Law, our family lawyers have acted for spouses in a wide range of financial proceedings involving family businesses, from start-ups to multi-generational firms. We have the experience to help you whether you are the majority shareholder, minority shareholder,  employed by the business, or not involved in the company.

Financial settlements involving a family business can be complicated as they raise complex issues, such as whether the business is a family asset, how it is valued or whether its current income stream is maintainable. Our legal experts have the expertise to guide you through financial proceedings involving a family business with all the complicating corporate, employment, and tax issues.

Are business assets relevant to divorce proceedings?

Business assets are potentially relevant to a financial settlement. They must therefore be disclosed in your financial disclosure.

The rules on financial disclosure of business assets in divorce apply to all types of businesses, including:

1. Companies
2. Partnerships
3. Limited liability partnerships.
4. Sole traders.

If you own shares in a family business, are a partner in a partnership or LLP or are a sole trader, you must disclose your business interests as part of your financial disclosure. Your finance solicitor can then make the case for you to say that your business is irrelevant to the financial settlement and its value should be ignored.

Arguing that a business is not a family asset can be based on these arguments:

1. Your prenuptial agreement said the value of your business would be ignored in any financial settlement.
2. The marriage was of very short duration.
3. You inherited, purchased, or developed the business before marriage.
4. Your spouse signed a postnuptial agreement that said the business would not be considered in the financial settlement.
5. Shares are held in a discretionary trust, and you are one of several beneficiaries.

Whatever argument your divorce solicitor recommends is put forward on your behalf, providing complete and frank financial disclosure of all personal and business assets is crucial. A finance lawyer will prepare your Form E financial disclosure and advise on how best to present your disclosure and your best case to argue that your business should be ring-fenced and excluded from the negotiated financial settlement or financial court order.

What happens if business assets are not disclosed in financial proceedings?

You need to disclose your business assets, whether you are involved in financial court proceedings or negotiating a settlement through:

1. Direct discussions with your spouse.
2. Solicitor negotiations.
3. Roundtable meeting.
4. Family mediation.
5. Family arbitration.

If you do not disclose business assets and they are discovered after a financial court order is made by agreement or after a court hearing, your spouse can ask the court to reopen the case and award them a share of the business assets or more of the non-business assets.

Failure to disclose or inadequate financial disclosure leaves you open to:

1. Risk of further court proceedings.
2. Costs orders.
3. Ending up paying your former spouse more than they would have been given at the final hearing of a financial application. For example, if the business substantially increases in value after the conclusion of the divorce proceedings.

If your spouse or their divorce lawyer discovers the existence of a business or other asset during the court-imposed financial disclosure process, this can lead to:

1. Your spouse asking the court to order additional financial disclosure. The extra disclosure may not have been ordered if you had not raised suspicion by failing to provide financial disclosure.
2. Your spouse asking the court to order that a forensic accountant be instructed to forensically consider the accounts and advise on a business valuation and liquidity.
3. Your spouse asking the court to draw inferences about your honesty because of your business non-disclosure.
4. Your spouse asking the court to order that a third party, such as the company or the trustees of a discretionary trust, be joined as an intervenor in the proceedings.

What happens when spouses are shareholders in a family business?

Divorce financial settlement solicitors say family law trumps company or corporate law because even if your husband or wife owns a 50% shareholding in the company, the family court can order the sale or transfer of shares in the financial proceedings.

Working in the same business environment can be particularly tough if you are getting divorced. It’s best to keep business and private stuff separate, if possible, so the business isn’t affected by your separation. It’s unlikely to be in either of your interests for the business to suffer if you struggle to work together until a financial settlement is reached.

Can a divorced couple agree to continue in business together?

A divorcing couple can decide to remain in business together after their divorce. The marriage may have ended, but you may be good business partners.

To reduce the risk of conflict and litigation (either family or corporate), you need:

1. A financial court order in financial proceedings.
2. A shareholder agreement if your business is a company.
3. A partnership or LLP agreement if you are in business as a partnership.

You should not rely on pre-separation corporate documents, as changes may be necessary. For example:

1. A new dividend policy so your former spouse cannot stop your dividend income unless clearly defined circumstances are met.
2. A new shareholder agreement to set out revised share voting or other rights.

These documents can ensure the success of your future business relationship with your former spouse. For example, the agreement could say that if your spouse remains employed by the company as the managing director, he cannot, as the majority shareholder, increase his salary from £60,000 to £200,000. The effect of this salary decision could change the amount of dividend income you receive.

Can I ringfence business assets so they are irrelevant in divorce proceedings?

You can try to ringfence your business assets so they are irrelevant to the financial proceedings by signing a prenuptial or postnuptial agreement. The weight given to this type of family agreement will depend on a variety of factors, including whether:

1. There was financial disclosure of the business as part of the prenuptial or postnuptial agreement process.
2. Your spouse’s reasonable needs can be met through a financial settlement from the available family assets.

For example, suppose the family assets are 12 million, and your spouse says their reasonable needs are 7 million after a short, childless, high-net-worth marriage. In that case, you can argue that your business assets, with an additional value of 15 million, should be ringfenced and ignored. Why? Even if the court agrees that your spouse needs 7 million, the money can be found from the available family assets that have been valued at 12 million.

Role of a shareholder agreement in divorce proceedings

If you divorce, your shareholder agreement may say your husband or wife must transfer their shares to you for £1. That does not mean your spouse will not get a fair financial settlement or a proportion of the family business.

If you want to protect your business after marriage, you need a postnuptial agreement consistent with your shareholder agreement’s wording.  If you are unmarried but plan to do so, you need a prenuptial agreement.

Our prenuptial agreement and postnuptial agreement lawyers can work with your corporate solicitors and business advisors to ensure that the family agreement tries to ringfence your business assets and is consistent with your new shareholder agreement.

Valuing a business in a shareholder dispute or divorce proceedings

Valuing a business in a shareholder dispute or financial proceedings usually involves the instruction of a forensic accountant.

The accountant is typically asked to consider:

1. The value of your shareholding or partnership.
2. The net value after the tax implications of a sale or transfer.
3. The potential income stream if you continue holding business shares.

The fact that a family court orders a business valuation doesn’t mean that the court will order the sale of the business. In most cases, the court will want to know the net value of the shareholding so it has an idea of the total extent of the family assets and any non-family assets. The court can then use that information to make a financial court order after weighing all the statutory factors to reach what the court considers a fair financial settlement.

Contact Evolve Family Law for expert family law advice.