Can divorcing spouses co-exist in a family business?

When a couple decides to divorce, all their assets are divided and distributed between them in a fair and equitable manner. There are no rigid rules applied and the court has a wide discretion on how assets are ultimately divided between spouses. When a divorcing couple share a business, the question the court needs to carefully consider is how this asset should be divided. Invariably when businesses or companies play a part in the financial settlement, the issue of matrimonial finances generally becomes exponentially more complex.

Generally, the business arrangement falls into two broad categories:

1. the silent shareholder/director (often to be considered more tax-efficient), or
2. the actively involved husband/wife in the business.

Typically, the first category is straightforward. The ‘silent spouse’ resigns as a director and transfers their shareholding to the other spouse. The spouse retaining control of the business will typically buy the other out. However, the division of shares can have important legal implications and consideration must be given to tax implications and the impact this will have on any other directors, shareholders, and employees.

The second category is much more contentious and often presents a bigger range of issues. Common scenarios include one of the spouses joining forces with other directors or management within the company to try and squeeze out the other party, by excluding them from business decisions or the operation of the company. They may also promote people within the company/business who are supportive of the way in which they run the business and so will take their side in important votes or decisions regarding the company. This can become very political very quickly and often leads to a deterioration of the spouses’ relationship and sometimes the business itself.

Alternatively, it is relatively common for one party to use their connections within the business to start up a new company and subsequently wage a campaign to get existing clients to transfer their business to the new company. This dilutes the value of the family business so that it becomes either virtually worthless or substantially devalued.

Divorced spouses should put a shareholders’ agreement in place, if they do not already have one, to make sure that any disagreements they have regarding the business going forward are dealt with fairly.

The valuation of a business usually brings difficult issues to the fore. This often involves independent expert evidence and, while necessary, it is a costly exercise to explore. It can be very technical and is generally never straightforward. It is also very important to ensure that the expert is properly briefed, and that questions posed to the expert are carefully crafted.

There are wide-ranging judicial opinions about whether a court should allow both parties to remain in the business after divorce, if both parties wish to do so. Some judges take the view that parties should be allowed to continue to work together in a financial endeavour even though they are divorced. Other judges take the view that it is generally better for the parties to separate both emotionally and financially in all respects. There is no one right answer and every situation will be highly fact-specific.

Some considerations include who started the business, how involved each party has historically been in the business, whether there are other assets that can be used to buy out one party’s share in the business, the type of business (is it big or small?), how the parties get on, and their positions within the company. Ultimately, from a practical perspective the decision can sometimes rest on whether the business can continue to operate and thrive despite a divorce or will the marital problems flow across and impact the business or simply make it unworkable.

If the divorcing couple are experiencing high conflict and there are other assets involved, then this may support one party having full ownership of the business, whilst the other receives different assets, for example, the family home or other assets and investments. Of course, one should be careful of the position they take as often both parties bring different skills to the fore – for instance, one may be very good at sales and the other may be more business-minded, taking care of the financials and the overall operation of the business. Consideration must be given to the role, if any, each spouse plays in the business and their contribution to the company. It is common that when this balance is disturbed, the business may suffer as a vital piece of the jigsaw is now missing. The business can sometimes be viewed as the riskier asset, especially in the current economic climate, and if you take the business and buy out the other (often the biggest asset), should it fail or lose money in the future, the onus is on the party retaining the company/business to solve the problem and absorb any losses.

In this circumstance, it is important to seek independent legal advice and decide whether expert evidence is required for (a) a valuation of the business, and (b) the implications of one or both parties seeking to take control of the business, be a direct competitor to the business, or run down the value of the business.

If you have any questions about the implications of divorce on a business or company and would like to discuss your circumstances in more detail, please contact Terrence Trainor.