Business in a Divorce – Financial Settlements

Businesses can be complicated. Especially when it comes to divorce financial settlements. I am regularly asked whether a spouse is entitled to a share of the other’s business. So, what happens to a business in a divorce?

First, we must look at how the Court decide financial settlements.

How does the Court decide a divorce financial settlement?

When it comes to financial settlements in divorce, there are no firm rules about how assets are divided. The law is discretionary. The Court decide each case on its own facts. In doing so, the Court must consider section 25 factors.

It should be noted that jointly owned assets are not automatically shared. Likewise, assets owned by one spouse are not automatically retained. The Court aims to achieve fairness.

The starting point for financial settlement on divorce.

All assets owned jointly or solely form part of the ‘matrimonial pot’. In the first instance, the Court considers all assets to be matrimonial. The starting point is then that all matrimonial assets are shared equally. This is known as the sharing principle. The Court applies this principle unless there is reason to depart from it. Often a key factor is the reasonable needs of both parties and any minor children. One party may need a greater share of the assets. This could be to meet their financial needs. Or it could be to achieve fairness when looking at all the circumstances. If this is the case, the Court applies the needs principle. Consequently, the sharing principle is departed from. The Court then determine the division of the assets based on needs.

What happens if needs are met?

If there are assets in excess of those needed to meet both parties needs, the Court then consider whether any assets are non-matrimonial. If so, the Court may decide those assets should be ringfenced. This means the Court excludes them from the financial settlement.

What is a non-matrimonial asset?

In short, non-matrimonial assets refer to assets the parties acquired before (or after) the marriage or those received as a gift or inheritance. The lines can blur when non-matrimonial assets are intermingled with matrimonial assets. As a result, the Court will carefully analyse the assets in question.

What happens to a business in a divorce?

The above principles still apply. Arguments for whether an asset is non-matrimonial are irrelevant if the remaining assets do not meet the needs of your spouse and any minor children. This is no different when a business is involved.

However, having a business adds another level of complexity to a financial settlement. 

What happens to a business in a divorce often depends on the available financial resources, the business structure, and business assets.

The Court generally does not like to interfere with business assets. The Court will therefore not lightly transfer or sell a business in a divorce. In fact, this is extremely rare.

Generally speaking, a spouse will retain their business. But it will likely be reflected elsewhere in the settlement. It is rare for the Court to ringfence a business and exclude it entirely. Often the Court at least considers it a resource of the spouse in question.

Does that change if my business is a limited company?

In short, no. Whether your business is as a sole trader, shares in a company or an interest in a partnership, it is likely to be reflected in the financial settlement.

A company is a separate legal entity.

However, the Court considers additional factors when a company is involved. This is because companies are their own separate legal entity which is independent of the identity of their shareholders. Despite this, the Court will ‘pierce the corporate veil’ of the company, if necessary, to make any Orders it sees fit. The Court therefore carefully considers the structure of the company. For instance, the Court look at the spouse’s level of control and the nature of the business assets.

Example 1.

Firstly, a company with third-party shareholders. The Court will have regard to third-party interests. Provisions within the articles of association or shareholder agreement may affect the type of Orders the Court considers appropriate. Likewise, they may affect implementation or enforcement. The Court will still make any Orders it sees fit in achieving fairness. These provisions will not necessarily stop this. However, an alternate solution may be needed.

Example 2.

By contrast, a limited company set up by one spouse as the sole Director. The company is used as a mechanism for income only. It otherwise has no value. Here, the only asset is cash in the bank.  This cash is probably immediately available to the spouse as the sole Director. It is therefore completely in that spouse’s control. The same limitations do not apply here. 

In summary.

How the Court approach your business will depend on your circumstances.

Firstly, on the financial resources available. Secondly and most importantly, whether there are sufficient assets to meet your spouses and any minor child’s needs. Thirdly, whether the Court considers any part of the business non-matrimonial. Lastly, on the nature and structure of the business.

To sum up, where the business is retained it will likely be reflected elsewhere in the financial settlement.

What Orders can the Court make against my business in a divorce?

The Court can make several Orders. These include:

Offsetting.

• One spouse retains the business or shares. The other is compensated. This may be:
  • with a lump sum payment. This is possible where you can extract capital from the business. Or, where you can borrow against the business or its assets.
  • elsewhere within the financial settlement.  For example, the other receives a larger share of the Family Home or savings.
  • by periodical payments out of the business profit. The availability of this depends on the income and profit produced by the business.

Transfer Order.

• Transfer of shares from one spouse to the other. Ordinarily, the Court only transfers shares where both parties are already shareholders reflecting the ‘clean break’ principle. This is where the Court aims to sever all financial ties between the parties if possible. Clearly, both parties maintaining an interest in a business would not achieve a clean break. Likewise, the Court typically do not transfer shares to the other as a new shareholder to avoid disruption to the business. That said, the Court will consider a transfer where a business makes up a significant part of the assets. 
• Both parties are made shareholders. Whilst the Court does not like to interfere with a business and aims to achieve a clean break. This is not always possible. The Court may decide to make both parties shareholders. For example, if there are insufficient assets to meet capital needs. Or where the business has substantial value.

Order for Sale.

• The Court may order the sale of the business or shares. This is extremely rare. Generally, the Court will only do so if there is no other way to achieve a fair outcome. 

In most cases, the business interest will be ‘offset’ against other assets. This is not necessarily £ for £ as the nature of different assets may need to be reflected. 

If the Court (or parties) are considering an offset, they must first address the value attributed to the business interest.

How do I value my business in a divorce?

You must have a fair and accurate valuation of your business. This ensures the financial settlement reflects the reality of your situation. A Forensic Accountant may be needed. They will consider at least two years’ worth of accounts and cash flow forecasting. They may also analyse comparative business models. 

Single joint expert.

If an expert is needed, both spouses should appoint a single joint expert.

Once a valuation is obtained, the Court considers how to deal with the value of the business along with the other assets available to be shared.

What can I do to protect my business?

There are several things you can do to try to reduce your spouse’s claim against your business.  These include:

1. You can put in place a pre-nuptial or post-nuptial agreement. You should ensure this sets out how the business will be dealt with on divorce. Whilst not technically legally binding, nuptial agreements can carry weight if certain requirements are met.
2. Also, you can put in place a shareholder agreement. You should tailor this to the specific needs and circumstances of the shareholders.
3. In addition, you should keep your spouse separate from all elements of your business. This includes keeping the Family Home and matrimonial finances separate. They should not be used to secure or finance the business.

Unfortunately, none of these provides a fail-safe. The extent of the protection offered will depend on your circumstances. 

Get in touch with our Financial Settlement Solicitor.

Have you recently separated? Want to know if your business will be reflected in your financial settlement? Please contact Gemma Keats on 07874349555 or by email to see how she can best support you.