Key takeaway
Divorce is rarely just about the family home, pensions or savings. When one or both spouses are shareholders, the breakdown of a relationship can create real risks for a company, including uncertainty for staff and investors, disputes between shareholders and even forced changes to ownership at the worst possible time. English family courts can and do take business interests into account when dividing assets, so careful planning is essential. With the right combination of corporate and family legal advice, it is usually possible to meet the needs of the individuals involved without destabilising the company.
What happens to company shares in a divorce?
When considering shares and business interests on divorce, the family court looks at the assets of both parties as a whole and decides how they should be divided by applying the statutory factors in section 25 of the Matrimonial Causes Act 1973. These include the financial resources of each spouse, their needs and obligations, the standard of living enjoyed during the marriage, their ages and the duration of the relationship, any disabilities and the contributions each has made to the welfare of the family.
Although the court normally starts from the idea that matrimonial assets should be shared fairly, often equally, it will also consider whether shares acquired before the marriage or inherited or gifted should be treated differently. Even so, if those assets are required to meet needs, they can still be brought into the settlement. The court ultimately looks at value and fairness rather than whose name happens to be on the share certificate, and business interests are no exception.
How are shares valued on divorce?
Before decisions can be made, the business must usually be valued. This may involve a single joint expert accountant who can determine the worth of the shares, using an approach suited to the nature of the company. For some businesses, an earnings-based valuation will be appropriate; for others, an asset-based model may be more suitable. Liquidity is also crucial because the court will want to know whether value can realistically be extracted without harming the business.
Valuation can often become one of the most heavily contested issues in divorces involving company interests. Once a figure is established, settlements can be structured in various ways, such as one spouse retaining the shares while the other receives more of the non-business assets, an instalment arrangement funded by future income or dividends, or a company share buy-back that releases funds while keeping control within the corporate structure.
Where the overall marital assets are insufficient to satisfy the needs of both spouses, the pressure can shift quickly to the company. An ex-spouse could potentially become a shareholder, voting power could change in an unplanned way, or the business may face a forced sale at an inopportune moment. It is common for law firms advising boards and shareholders to emphasise that waiting until a divorce is already underway severely limits the available options.
How can companies protect themselves from divorce-related risks?
Thoughtful corporate planning can prevent many of these risks. Articles of association and shareholders’ agreements can be drafted to ensure that a divorce does not destabilise the company. Transfer restrictions can prevent shares being passed to a new and unwanted shareholder, and pre-emption rights can ensure that the company or existing shareholders have the first opportunity to acquire shares that might otherwise fall into the hands of a former spouse.
Valuation mechanisms set out in advance help avoid business disputes at an emotionally charged time. Increasingly, companies are also adopting compulsory transfer provisions that require a shareholder served with divorce proceedings to offer their shares back to the company or fellow shareholders. These clauses must be drafted well before any relationship difficulties arise and in good faith (more on the importance of a well drafted contract), but when prepared properly, they can be highly persuasive and reduce the likelihood of the court making an order incompatible with the company’s constitutional documents.
What shareholder rights matter on divorce?
Drag-along and tag-along rights can also be useful in the context of divorce. Drag-along rights allow majority shareholders to complete a sale of the entire company because they can oblige minority shareholders to sell their shares on the same terms to a buyer. This prevents an ex-spouse with a small shareholding from blocking a transaction. Tag-along rights, on the other hand, protect minority shareholders by ensuring that if the majority sell, the minority may sell their own shares on identical terms. In a divorce situation, this can prevent a spouse who owns a small portion of the business from being left behind in an unfavourable ownership structure.
How to resolve shareholder deadlock in a divorce
Where spouses are also business partners or directors, the breakdown of the personal relationship can create deadlock in the boardroom. Shareholders’ agreements can include step-by-step processes for resolving such disputes, beginning with negotiation and mediation and escalating to expert determination or arbitration. If deadlock persists, buy-out mechanisms can allow one party to exit while safeguarding the continuity of the business. Read our recent article on resolving shareholder deadlock for more.
Do nuptial agreements protect business interests on divorce?
Beyond corporate documentation, nuptial agreements are increasingly recognised as a critical tool for business owners. Whether entered into before or after marriage, these agreements can identify business interests as non-matrimonial property, set out what financial provision would be appropriate on divorce and significantly reduce the risk of a company being sold or restructured solely to fund a settlement.
While not absolutely binding in England and Wales, the courts will generally give substantial weight to a properly negotiated nuptial agreement, provided both parties received independent legal advice, full financial disclosure was made and the terms are fair. For entrepreneurs, investors and family-owned companies, the most effective approach is often a combination of nuptial agreements for individual shareholders and carefully drafted corporate documents at company level. Read more on why you should consider a prenuptial agreement.
Practical steps for companies facing shareholder divorce
Practical measures for companies include reviewing articles and shareholders’ agreements with both corporate and family lawyers to identify weaknesses, considering whether divorce should trigger compulsory share transfer, ensuring that valuation mechanisms are up to date and thinking about how liquidity would be generated in the event that a shareholder needs to fund a settlement.
Families transferring shares to the next generation may wish to require nuptial agreements as a condition of receiving shares. In more complex situations, coordinated advice from corporate lawyers, family lawyers and accountants is essential to ensure that the interests of both the company and the individuals are protected.
Divorce can undoubtedly place pressure on a company, but with forward planning it does not have to threaten stability or long-term value. By combining thoughtful corporate governance with clear personal arrangements, shareholders can safeguard the business they have built and ensure that it continues to grow, regardless of changes in their personal lives.
Please contact the team at Barnes Law for private consultation divorce services.
Authored by Barnes Law Managing Partner, Yulia Barnes.
