Divorce proceedings are rarely straightforward. Navigating the emotional and financial complexities can be challenging, particularly when either one or both spouses are involved in businesses. The treatment of business assets during divorce requires careful navigation, especially where parties are financially tied to a company. Questions often arise in relation to value, ownership, whether the business is a marital asset and how to equitably calculate and divide business interests.
This article explores the treatment of limited companies in divorce proceedings, highlighting practical steps that can be taken to ensure that business ventures remain distinct from marital assets.
Is a limited company protected in a divorce?
When a marriage breaks down, one of the key steps in divorce proceedings is identifying and valuing the assets that make up the “marital pot”. Whilst a limited company is a separate legal entity, and therefore distinct and independent from its owners, all assets and interests are capable of being a marital asset. This means that property, savings, investments, pensions, and business assets may all be included in the calculation and considered when determining how assets are divided in a divorce.
How are businesses treated as divorce assets?
Limited companies can vary significantly in their structure and financial makeup. Two common types are capital-heavy and income-generating businesses. Capital-heavy companies typically hold substantial tangible assets, such as property, machinery and/or investments. Whereas, income-generating companies produce revenue through the provision of services or ongoing contracts, and have fewer tangible assets.
Understanding the makeup of the company is essential for valuing it as part of divorce proceedings. An independent valuation is obtained to ensure that a fair and accurate picture of matrimonial wealth can be drawn. An independent expert, such as an accountant, with knowledge of the industry, is usually engaged to assess the value of the business. An independent valuation provides an objective figure that can be disclosed during the process of financial disclosure. An accountant can also be used to address issues surrounding liquidity of the business and protecting future income.
However, valuations of private limited companies are inherently uncertain and fragile. Ultimately, it will be for the court to determine its true value.
What happens if I’m a limited company director and shareholder going through a divorce?
For director-shareholders going through divorce, it’s essential to balance your legal obligations with the continued success of the business. Key points to consider, include:
Maintaining business continuity by continuing to act in the best interests of the company. This includes avoiding using company funds for personal, legal expenses or allowing the business to be drawn into any personal disputes. Maintaining clear boundaries will assist with preventing breaches of director duties.
Protecting confidential information, such as company records, financial statements, and client lists. You should avoid disclosing sensitive business information, beyond what is required for full and frank financial disclosure in divorce proceedings. Liaising with the business’s legal and financial advisors can assist with ensuring that the disclosure process is properly managed, documents are presented accurately and commercially sensitive information is protected.
Engaging a valuation expert early. Given the complexity and uncertainty surrounding company valuations, instructing an independent expert early can help with ensuring that an accurate valuation is obtained and all necessary considerations are included.
Planning for possible outcomes, such as share transfers, buy-outs or other restructuring. Having open conversations with fellow shareholders sooner, rather than later, can help manage expectations, preserve working relationships, and avoid disputes that could harm the company. It also allows time to explore protective measures, such as updating shareholder agreements or implementing buy-back provisions.
Can my spouse take half of my limited company?
Whilst the starting point is a 50/50 split of assets upon divorce, in reality, every divorce settlement is different and the way in which the marital assets are to be divided is dependent upon many factors. Whilst there are no set rules for how assets are split in a divorce, the principles of fairness and “needs” are at the forefront, guided by the Matrimonial Causes Act 1973. The most important factor to be considered are the needs of each of the parties, alongside age; assets; earnings and earning capacity; children and the length of the marriage. There are other factors too which may be more or less influential depending upon the circumstances.
One of the ways in which a financial settlement can be negotiated between the parties is through offsetting. This method of asset division allows an individual to keep a specific asset in exchange for their spouse keeping a greater share of other assets in the marital pot. For example, it would be possible for an individual to keep all of their company shares in exchange for giving up a greater share of their pension. One of the key advantages of offsetting is that it can help to achieve a ‘clean break’ divorce. Offsetting can be difficult and complex to achieve.
If my spouse owns a business, do I own it too?
Throughout any financial proceedings within a divorce, the court places great emphasis on obtaining a fair outcome for both parties.The objective of the court is to achieve a financial settlement that reflects the financial and non-financial contributions made by both parties to the marriage, to allow the parties to live independently of one another post-divorce. In longer marriages, it is often the case that one party to the marriage makes non-financial contributions to the marriage, such as managing the household and caring for the children. In doing so, the party making these indirect contributions is often acting to the detriment of their own career and financial progression. In seeking to obtain a fair outcome for both parties, these indirect contributions to the marriage are both recognised and valued by the court and can influence the division of assets, particularly in longer marriages.
Whilst then not technically a legal owner of a business, it may be the case that the court assesses that the input into the marriage by one party enabled the creation of that business wealth and it should therefore form a part of the matrimonial wealth pot.
Can I protect my business from divorce?
From a family law point of view
One of the tools that can be used to help protect your business from any potential divorce proceedings is through a prenuptial agreement, more commonly referred to as a ‘pre-nup’. This is a deed that is entered into by both parties to the marriage before they get married or have a civil partnership. The contract forms an agreement which sets out the way in which the parties to the marriage wish for their finances to be dealt with if their relationship were to break down in the future. Within this agreement, provisions can be made in respect of any business assets that either party has. Provided certain provisions are met, it may be possible to exclude some or all of the business from the matrimonial pot.
If you are already married and did not enter a prenuptial agreement, you can enter into a postnuptial agreement. As the name suggests, this is an agreement that is entered into by a couple who are already married or in a civil partnership and has the same effect as a prenuptial agreement in setting out the way in which the parties intend to manage their assets if their marriage or civil partnership were to end. This may be appropriate where a party to the marriage is a shareholder to a business that has seen rapid growth since the marriage and they would now like their shareholding to be protected in the event of any future separation.
The law relating to nuptial agreements is highly complex and exceptionally nuanced. The circumstances of the financial arrangements are highly relevant, and it can be impossible to exclude certain types of asset from the matrimonial pot. A court may choose to ignore certain parts of an agreement if it has been badly drafted or impinges upon the court’s power in a way that the court feels would fail to allow the other party’s needs to be adequately met.
From a corporate law point of view
Maintaining a clear separation between personal and business finances is a relatively simple and inexpensive way of protecting your business. Clear separation provides clarity surrounding ownership and establishes your business as separate property; it can evidence that your business is not a marital asset.
Shareholders’ agreements are a useful tool for outlining the rules and expectations for the shareholders (owners) of a business. Its main purpose is to clarify the rights and responsibilities of each shareholder, protect each shareholder’s interest and investment in the company, set rules and protections for the sale or transfer of shares and define how major decisions are made.
A well-drafted and up-to-date shareholders’ agreements can help align expectations around protecting company ownership. It encourages early dialogue and allows the shareholders to prepare for and consider future difficult situations, such as divorce. A shareholders’ agreement can be drafted to include provisions relating to:
- Requiring shareholder consent for share transfers.
- Allowing for pre-emption or buy-back rights in the event of divorce of any of the shareholders.
- Define what happens in the event that a shareholder is required to transfer part of their interest in the business.
Understanding your rights during divorce
As we have outlined, business interests are not automatically excluded from divorce settlements. In fact, they can often be considered part of the “marital pot” and can be subject to division or an order of the court. The uncertainty surrounding the status of business assets as part of a divorce can raise significant issues in relation to business continuity, ownership and control and long-term value.
Proactive planning, through protective measures such as pre- and/or post- nuptial agreements, shareholders’ agreements and a clear division of business and personal finances can help protect your business, whilst also facilitating a fair outcome for all parties.
Obtaining advice sooner, rather than later, is essential to assessing your business’s exposure and implementing safeguards, to ensure that your business remains stable and protected whilst you navigate your divorce settlement.
How Goughs Solicitors can help
Overall, proactive planning is key to safeguarding your company and ensuring business continuity in the event of divorce. Putting clear structures and documentation in place, particularly through a well-drafted and considered shareholders agreement, ensures shareholder-alignment.
Goughs have experienced divorce solicitors who can assist you in all areas of your separation to help you navigate through the next steps. Get in contact with us today to speak to a solicitor or advisor who can give you tailored advice and arrange a free initial half hour appointment.
