In many of our cases we encounter privately owned companies run jointly by a married couple as 50:50 shareholders and directors. But what happens to the company if they get a divorce?
Sometimes the spouses are equally involved in the business and in other cases, one spouse has taken the majority role, often with the other spouse playing more of a nominal role.
When a divorce or separation comes along there can be major problems for the company and the spouses. Sometimes, there isn’t a 50:50 arrangement and there are other shareholders or directors involved. This can be an added complication and those third parties can become very anxious about their position in the company – we’ve written more about protecting third party business interests during divorce here.
What to consider if married company directors get divorced
#1 – Who controls the company?
Often in a simple 50:50 shareholding the company will effectively be “locked”, in that neither spouse will be able to make decisions without the consent of the other.
Advice from a corporate lawyer should always be taken to see if there are mechanisms to deal with this on an interim basis – we are fortunate to have a substantial corporate team in our firm to liaise with over such issues and great care should be taken to ensure that correct procedures are followed under Company Law.
#2 – Married company directors working together after separation
Within the divorce and resolution of financial matters the court has the power in the event of a dispute to transfer the company shares between spouses subject to any restrictions laid down by the Articles of the Company. This is a complex area but it does mean that ultimately it is unusual for a divorcing couple to be compelled to continue to work together against their wishes.
This does happen sometimes however, where finance will not permit a buy out of the other spouse (even by an instalment arrangement) but the court will usually try to assist the couple in separating their business interests.
If the couple have to stay in business together it is possible for a comprehensive shareholders agreement or partnership agreement to be drawn up to regulate the way in which they run the business. This can be done to ensure that neither party makes major unilateral decisions but clearly the future joint operation of a business between divorced spouses is fraught with difficulty.
A clean break is usually the preference of both parties so this usually means one exiting the company structure by agreement.
#3 – Leaving the business
One spouse exiting the company can usually be done by an agreed transfer of shares or the company itself buying back the shares of the departing spouse. Detailed accountancy advice must be taken at the earliest opportunity as there can be major tax consequences for both spouses. The availability of Business Asset Disposal Relief or BDPR (previously entrepreneur’s relief) is a major consideration.
It is very important that the outgoing spouse does not resign from their post as Director or employee before an overall settlement is reached as they could lose the availability of BDPR which could involve them in paying far more tax than should have been the case. Tax and other indemnities need to be carefully considered and both spouses need to ensure that they work closely with their accountants as well as their solicitors to ensure that the settlement negotiated is tax efficient and protects both parties.
#4 – Business valuation
When one spouse exits from a company there is usually the need for a valuation of the company. Sometimes it is possible to agree this but on other occasions it is necessary for the parties to jointly instruct a specialist forensic accountant to value the business and their respective interests. That accountant can also be asked to give advice on tax and liquidity considerations for the company. A good valuation report can often “unlock” negotiations and enable both parties to proceed to a settlement but this can be expensive so the cost must be proportionate.
In summary, this is an area in which specialist legal and taxation advice should always be sought before any changes are made to the company structure.
We have written more about practical first steps to take here. If you’re particularly concerned about the impact of Covid-19 on your business during divorce, this article may also be helpful.