If you’re shrewd then you may already have Shareholders Agreement in place with deemed notice transfers and plans for this eventuality; your ownership and contributions to the business will be clearly documented and your will have service level agreements for all high level with restrictive covenants.
Unfortunately, life is rarely found in such neat, square boxes that we lawyers dream about and, when pressing business owners, I often hear the words, “Isn’t that all a bit unromantic?”
English Matrimonial Law
In summary, if you have no documentation otherwise then all your assets (including the business value) go into a single ‘matrimonial pot’ and the court will consider a fair division of those assets between you. An equal division of matrimonial pot is frequently the starting point for family proceedings and, unless you can show why that is unfair, it may also be the finishing point too.
If you have no documentation otherwise then all your assets (including the business value) go into a single ‘matrimonial pot’ and the court will consider a fair division of those assets between you.
If you own a business together, you will also have to decide the practicalities of how that falls to be divided. On this I always remind couples that the financial separation is exactly that: a separation. The aim is to divide assets between you and achieve a clean break as far as possible, not create new ties or obligations. If one spouse is the actual business worker and the other a more symbolic appointment (usually for tax beneficial reasons), then a court is unlikely to allow the symbolic director/shareholder to retain their shares and position as a part of the divorce. That doesn’t mean they relinquish them for free either though.
In contrast, where the parties have set up the business together and work together at it, the outcome is less clear. Can you work together with your spouse for the business good? Can the business be divided without significant impact? How can one spouse justify keeping the asset to the exclusion of the other?
Business continuity and transparency
Before the above formal division of the matrimonial assets, you will still both remain joint owners of the business. If you do not have day-to-day involvement in the business, you may query if your spouse is being entirely truthful or transparent with the business accounts. If you are a director, then you are entitled to see those accounts and you can expect to be involved in any decisions. If you are a shareholder, then the rights are different but can be exercised to gain information and holding directors to account.
A company’s liquidity may also prevent a truly clean break from occurring. Be mindful of changes in business assets decreasing this liquidity, assets being sold at an undervalue or company goodwill being more conservatively valued. The family court has far reaching powers to reverse transactions or ‘count in’ assets at the actual value instead so that no loss is suffered, but it may become necessary to have an independent accountant obtain the real business value.
Not everything has to end in an argument or a court battle. The reality for most couples is that the business is an asset which will be traded against others for either capital or income potential which is being gained or lost respectively.
If you wish to have a more amicable divorce when you own a business together, then here are some simple tips:
- Keep clear and distinct financial records, monies paid in and withdrawn, clearly record any loans to the company and the intention for the repayment of that loan.
- Understand the value of the IP and the goodwill of a business.
- If you are not actually working in the business, avoid making verbose claims of keeping shares or remaining a director. Remember you are trying to separate assets, not simply wind up your spouse, and fairness will ensure the company value is accounted for regardless.
- Instruct lawyers and good accountants known to resolve issues rather than litigate. Members of Resolution are committed to a non-confrontational approach and you should find a lawyer who has this membership.
- Mediation and/or arbitration is always available to amicably discuss and agree matters. They are forums designed to help challenge you both into finding a realistic solution, but they are not advisors.
Separating business assets is a difficult process, but acrimonious actions aimed at crippling the business or stopping it from working effectively will have longer lasting impacts not just for you both, but income available for your children and employment of your staff.
You should be realistic about how a business would continue and look to how both of you would go on to make your own money independently. Ultimately, the concept of ‘fairness’ will rule the day.
Posted on July 9, 2018