The impact of divorce on shareholders and shareholdings

8 March, 2011

Who do you need if you are married couple who share ownership of a business or you are the owner of a business and divorce is in the offing?  Do you need a good divorce lawyer or a good company lawyer? 

In the case of a married couple the first consideration should be whether there is a shareholders agreement in place.  Subject to the overriding power of the family courts (about which see below) such an agreement may well provide a mechanism to divvy up the business or extract one party without damaging it.   It might even be sufficiently robust to allow the parties to stick together as business partners if not marital ones.

A further consideration might be whether there is a pre-nuptial agreement covering the business (or even a post-nuptial agreement – it is never too late!).

In the absence of a shareholders agreement / pre-nup or in the situation of a business owner being pursued by their spouse the key consideration is going to be how much is the divorce likely to cost and where is that money coming from.  If wealth has been built up outside the business then great, otherwise the starting point is working out how to extract value from the business, tax efficiently and without destroying it.

Most of the argument is likely to be about value so you will almost certainly need to get a good accountant on board at some point.  If you can agree on who should value the business then this will save a lot of hassle and expense.  Having two competing experts will more than double the costs involved.

Agreement / settlement should be the goal of every business owner in this situation.  The reason for this is that the family courts have extremely wide powers with regard to the re-distribution of assets between spouses.  A business is just another asset and is capable of being divided up or transferred to one spouse just like any other asset.

Some orders that the court can make include:

  • the transfer of shares to a spouse
  • the transfer of business premises to a spouse so that they obtain a rental income
  • requiring the business owner to raise cash from the business
  • ordering the sale of valuable assets within the business to release cash

Whilst the court will have regard to the interests of third parties it may not always appreciate the effect of such actions on the business.  The interests of the business must in theory be balanced with the interests of the family but there are no prizes for guessing which way the “family court” is likely to lean.

What this means is that what you really need in these circumstances is a good divorce lawyer who knows a good company lawyer. 

For further advice and guidance on this topic please visit either our Commercial Dispute Resolution webpage or our Divorce and Family Issues webpage