There are many preconceptions in relation to what happens to the business and shares upon divorce. A popular misconception is that businesses do not form part of financial settlement between the divorcing parties, when in fact, the Court have powers to interfere with the business, particularly when the business is a significant asset of the marriage and essential to meeting the parties’ needs.
There is no fixed method on how business and shares are to be treated upon divorce, as each case will be decided on its own facts. The Court will therefore adopt a bespoke solution where they will consider a variety of factors that are relevant to the case that is before them, in order to reach a fair financial distribution.
See below a non-exhaustive list of factors the Court may consider in cases where businesses are involved.
1. Nature of the Parties’ interest
The party/parties with ownership will be required to establish their interest in the business to the Court, for example:
- Are they a sole trader, partner, or a shareholder in a limited company?
- They will need to verify the performance of the business and establish the value of their interest by producing business accounts for at least the last two financial years.
- Any monies that are owed from the business to a party in terms of current accounts, directors loan account or partnership capital will need to be declared.
2. Matrimonial and Non-matrimonial
Is the business matrimonial (acquired during marriage) or non-matrimonial (acquired before the marriage, inherited by one party or acquired by way of a gift). Where matrimonial assets will be shared, non-matrimonial assets may not be shared i.e., they may be ring fenced. This will depend on the following:
- When the business was set up.
- If the business was set up before marriage, then was the business built up during or after the marriage?
- As long as the parties’ needs can be met, the business may be shared unequally in favour of the party with ownership, or retained by that party entirely.
3. Valuing the business
Obtaining a valuation for the business may not always be necessary, for example, if the business is merely an income stream and holds no significant value. However, in many circumstances, it may be necessary to instruct an expert (i.e., a forensic accountant) to establish the following:
- The value of the business.
- What income the business may generate in the future.
- Any Capital Gains Tax (CGT) that may be incurred upon sale.
- The parties’ net interest in the business after payment of CGT.
- Other tax implications of selling or disposing of shares in the business.
- To consider the liquidity and illiquidity of the business.
4. Liquidity and illiquidity of a business
It is practical to establish what liquid assets and illiquid/fixed assets the business has, to determine whether funds can be extracted from the business, in order to consider the following:
- Discounts that can be applied to the valuation of the business to reflect the illiquid assets and/or minority shareholdings.
- Where one party is a shareholder, consideration of whether shares can be transferred from one party to the other rather, than a lump sum being paid.
Common Orders made by the Court
Generally, the Court will want to achieve a financial clean break if this is possible. Certainly, most parties do not want ongoing business ties post-divorce.
Usually when one party is involved in the running of the business, they will retain the business and the other party will be compensated by way of a lump sum payment or periodical payments.
In some cases where there are insufficient assets to meet the parties’ capital needs, and the business has a substantial value, it may be appropriate to divide the shareholding in a business. The Court may order a transfer of shares, or to avoid a transfer of shares the Court may order a deferred lump sum. The Court may also order a sale of the shares, subject to tax implications.
Although the Court has power to order the transfer or sale of shares owned by one party, it does not have the power to order transfer or sale of assets owned by a company, as a company is a legal entity in its own right and not a party to the proceedings.
This information should be treated as guidance only and not strict advice. It is important to remember that each case is different and will turn on its own facts. It is therefore suggested that you speak to one our family lawyers and/or your accountant at an early stage of your divorce, so that you can be advised as to how your business will be affected and dealt with upon divorce.
If you are planning to get married, then we suggest you consider a prenuptial agreement so that you can protect yourself from any potential complex disputes surrounding the division of business assets upon divorce. The Courts are becoming more and more receptive to pre-nuptial agreements, provided they have been drafted appropriately.
Please contact our family team Amera Karim Nazib to arrange an initial consultation.