Facing divorce as a business owner can be a daunting prospect, particularly for those that have put their blood, sweat and tears into it, or where the business has been passed down to them by family. It shouldn’t surprise people to know that businesses are often at the heart of some of the most complex and hotly contested legal battles.
The family court’s powers when dealing with companies are wide ranging. Not only can judges take into account the net value of a spouse’s business interests when deciding how to split all the assets between the parties, they can also order:
• Payment of a lump sum by one spouse to the other, expecting that they will extract it from the business;
• The transfer of shares between spouses;
• The sale of the shares and ultimately the sale of a business.
These orders might be effective immediately, or conditional upon future events or at a future time with interim measures to protect the receiving spouse’s share of the net proceeds and prevent any dilution of the current shareholding.
The extent to which the court exercises its discretion to use such powers varies widely and turns on the specific facts of each case. For example, shares that have been passed down in a family company for generations are likely to be treated differently to those in a company established during the relationship. Further, if the spouses rely heavily on the income generated from the business and that is to continue with one spouse paying monthly maintenance to the other, the court will also take that into account.
To determine the true value of a spouse’s interest in a business, a single joint expert forensic accountant would be appointed to report on the value of the company as a whole, and in turn the spouse’s interest (taking into account things such as tax and disposal costs, and discounting for minority shareholdings and/or restrictions in shareholder agreements). They can also be asked to advise on:
• The liquidity of the business and how much it can sustainably raise to buy out the other spouse or help meet the parties’ needs, and;
• The maximum maintainable income that a spouse can have from the company.
Once the net value is determined, there are often arguments raised as to whether or not it should be considered as matrimonial, and if so, to what extent. The court will take into account the history of a company, including when it was created, if it is inherited, its value prior to marriage, and the extent to which any increase in value during a marriage was passive growth or due to endeavours by either spouse. These arguments can fall by the wayside though if there aren’t enough other assets to meet the parties’ needs.
You might think transferring shares in a business to a family member or a trust will solve the problem, however, think again, as judges have the power in some circumstances to set that transfer aside.
It’s a difficult topic with a lot of variables, but ultimately the best way to protect any business is to put in place a pre or post nuptial agreement when the relationship is on a good footing, which ring fences the business from being shared with the other spouse, and explains precisely how their needs will be met from other assets.
If you are a business owner and want to understand more about protecting your business and the options available to you, please do contact B P Collins’ family team for a confidential conversation by emailing enquiries@bpcollins.co.uk or call 01753 889995.
