Protecting the family business – dealing with shares in a divorce

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The fortunes of family businesses rely heavily on maintaining positive relationships within them. However, inevitably, the stresses and strains of juggling a business with domestic life can create conflict. When this results in divorce, finding a way forward can become complicated and uncertain for the individuals involved and for the business itself. Fortunately, the latter can be protected by developing a plan to deal with the company shares as part of the divorce process.

Any shares will be treated as assets of the marriage and can be divided between the divorcing couple. It will be for the Court to determine how best to fairly divide the residual value of the shares once tax and related costs are taken into account.

If one of the spouses is a non-shareholder, they may choose to seek an independent valuation of the shares and if there is a dispute over the valuation, the Court can make orders specifying whether a ‘single joint expert’ should be appointed to settle the issue. As well as ascertaining the value of the company, the valuer can determine any discount that should be applied to a minority shareholding, the tax anticipated as due on the sale or transfer of shares, whether any funds can be extracted from the business and the likely dividend income.

The Court has the remit to order the sale or transfer of shares. However, in most situations this is not in the best interests of the business nor the non-shareholding spouse. The Court can order the shareholder to pay a lump sum to their spouse, based on the valuation of the business. It can order that the non-shareholding spouse receive more of the other assets owned within the marriage to offset the shareholding, either as a lump sum or in instalments. Although an extremely rare outcome, the spouses may continue to own shares between them after the divorce, possibly with an independent Director acting as an arbiter where necessary.

Each situation is unique and will be dealt with on its own merits. For instance, the length of the marriage, the length of time the shares have been held, and whether there are children involved can all influence the outcome.

Transferring shares to a third party to avoid a financial claim could complicate the divorce and any such transfer may be overturned by the Court in any event.

Making a shareholders agreement before or during the marriage can be beneficial in determining how assets are dealt with should the relationship end in divorce, and can ultimately serve to protect the business.

Acting early and seeking advice in the process is also important, particularly in terms of mitigating tax issues involved with shareholding and divorce. Obtaining a Court order within the divorce is crucial in serving to protect the company against future claims by a non-shareholder spouse. Without one, the possibility of former spouses making financial claims against each other at a later point will linger.