DIVORCE & THE FAMILY BUSINESS
The impact of divorce doesn’t just affect spouses and children. Divorce and business assets aren’t separate. The ramifications of a divorce can affect a family business and impact on the other company shareholders and company employees.
Many people assume that if there’s a family business that the business assets are ring fenced and won’t form part of the divorce financial negotiations or Court ordered financial award. That is not the case. As part of the divorce financial proceedings the Court can order the valuation of business assets as well as order the sale or transfer of company shares. It is therefore important to get early specialist advice from family finance solicitors on divorce and business assets to help sort out the division of business assets on divorce and can explore all the options with you.
Do you have to disclose a business assets if they were owned prior to the marriage?
Yes, you do. Failure to disclose any business asset could have serious implications in any divorce financial Court proceedings. If an agreement is reached or a Court order made without disclosure of a shareholding then the order could be overturned at a later date. Within the financial negotiations or in the Court proceedings it can be argued that the divorce business assets or shares should be ring fenced as they were acquired prior to the marriage.
Can shares be transferred to a third party to avoid a divorce financial claim?
If shares or other business assets are transferred to a third party with a view to avoiding or defeating a financial claim the Court can make an injunction order or can order the transfer of the assets or shares. If shares are transferred then it is likely to make the Court proceedings more complex and furthermore the Court could make adverse inferences about the timing of the share or business asset transfer.
I am the sole shareholder in the company but my spouse is an employee. Can their employment be terminated as we have split up?
A spouse who is an employee of the business has employment rights, whether or not they are an officer of the company or a company shareholder. Accordingly a spouse has employment law legal remedies if their employment is terminated as a result of the separation. It is therefore vital to get early legal advice before sacking or making a spouse redundant. If a spouse’s employment is terminated resulting in a loss of income they may be able to claim spousal maintenance in addition to their employment law claims.
Often the spouse who is the majority shareholder in the company will want their spouse to leave their employment in the business. This can normally be negotiated as part of a financial settlement, with an agreement that the employee spouse won’t be able to bring any separate employment law claims.
My spouse and I are 50% shareholders in the company and have a shareholder agreement so the Court can’t overturn the company agreement, can it?
Even if there is a company shareholder agreement the divorce Court can make orders in relation to the divorce business assets and shares, including orders for the sale or the transfer of the shares.
My spouse and I are splitting up amicably and want to continue to run the business together.
It is important that any agreement reached is properly documented to avoid problems and disputes in future and in order to minimise the risk of a future falling out. Protection can be provided by written employment contracts, a shareholder agreement and a family financial Court order. These types of documents provide checks and balances, such as recording what the agreed policy on declaring dividends is or the policy on employing new staff so both spouses have legal protection. With these documents in place, many spouses are able to successfully work together even if they can’t continue to live together.
How are shares valued for divorce financial proceedings?
Sometimes it isn’t necessary to value a company or a shareholding, for example if there is an existing agreed sale of the business to an arm’s length third party or the company is a new start up. However, in many family situations, the company shareholding and the income it produces is the main asset and accordingly it does need to be valued.
Often shareholders assume that the company should be valued by the company accountant. The views of the company accountant may be helpful to the shareholders but it is normally the case that the non-shareholder spouse will want the company to be valued by an independent expert. A husband and wife can agree to this or the Court can order the valuation of a business by a jointly appointed accountant, known as a ‘single joint expert’. This report will usually look at the:
- Value of the company as a whole;
- Value of the husband or wife’s shareholding if they are not 100% company owners and applying a minority shareholding discount, if relevant ;
- Tax implications of a sale or transfer of the shares;
- liquidity of the shares;
- Potential income from the business, sometimes the level of dividend income is not sustainable and in other company situations the shares could provide additional income.
The accountant report can be asked to address other matters, such as an analysis of the movements on a director’s loan account.
A shareholder will usually want to retain the shares and so won’t see the need for the company to be valued. However if the shareholder is going to keep the shares in the company then it is necessary to know how much the shares are worth to then be able to calculate how many of the non-business assets, such as the family home or pension, that the other spouse should retain.
What orders can the Court make in relation to a shareholding or interest in a family business?
The Court can order the:
- Sale of the shares;
- Transfer of the shares.
Other orders that the Court may make that can affect the company are:
- The payment of spousal maintenance – the Court’s decision on the amount of spousal maintenance may be based on the expert’s views on what is a sustainable level of income from the business;
- The payment of a lump sum to the non-business owner spouse or to the spouse ordered to transfer their shares – the amount of the lump sum may be based on the expert’s views on what the shares are worth and also the liquidity of the company.
In a divorce is the timing of a share transfer between spouses important?
Potentially yes as the timing of the share transfer can have an impact on whether any tax is payable or not. It is therefore always important to get specialist legal and accountancy advice at the time of separation when considering divorce and business assets.