Tom Farley-Hills, family law partner at Harbottle & Lewis talks through the options available to couples going through divorce when corporate assets are shared
Divorce is one of the most difficult experiences a couple can face, exacerbated further when it comes to dividing up the family wealth. This can get even more complicated when couples have had shared business interests, have set up a company together, or are the co-creators of something unique. For couples in this situation, there are some key pitfalls that must be front of mind.
The family court has the power to treat corporate assets, particularly shares, like any other tangible asset. It can order a sale, or a transfer from one spouse to another, or the settlement of shares into a Trust for the benefit of a spouse or a child of the marriage.
The norm for rulings before the House of Lords decision in White and White in 2001 was for a spouse’s settlement to be limited to their reasonable financial needs. This approach has now been deemed discriminatory as the spouse that undertook the traditional ‘homemaker’ role usually ended up with considerably less than the ‘breadwinner’. Significantly, the House of Lords ruling hailed a new dawn in the approach to dividing assets on divorce meaning that the overriding consideration was to divide assets between spouses fairly, and fairness we now know, means a division of assets based on equality.
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From the White decision onwards, the family court has been tasked with not just valuing all of the marital assets, but determining the extent to which each asset is liquid and any contingency or risk attached to that valuation.
A fair division of assets should also mean that marital assets are not just divided equally but that all assets should be divided fairly, so that one party does not become burdened by all the risk or end up with a disproportionate amount of illiquid assets.
Shares in a private unquoted company present several difficulties for family court judges when applying value and when dealing with them in a way that is fair to both parties. Therefore, the court will usually adopt a bespoke approach when dealing with corporate assets within a divorce settlement. Notably, although the court has the power to order the sale or transfer of shares, often the best way to achieve fairness may be to leave the corporate assets well alone.
There are many scenarios where divorcing couples might come up against these challenges.
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A divorcing couple, George and Mandy, own an equal share within their company which designs and licenses radio hardware. George invented, designed and continually develops the hardware whilst Mandy created the license, obtained the patents, and has been the point of contact for their main client. The divorce is acrimonious and neither party wishes to sell as George would have to remain in the company and the family’s main income stream from the business would be killed off. In this instance, the court is most likely to transfer Mandy’s share to George (as the main developer), making sure Mandy is provided for a fair price for her share and (if due) ensuring she receives ongoing maintenance to replace any lost income.
Rita May, a famous ballet dancer, is the 100 per cent shareholder of Jete ltd, a service company through which the entirety of her income is paid. Rita is now divorcing her husband Peter, a stay at home father. Without Rita, the shares are worthless and due to this, the court will most likely be inclined to allow Rita to keep her 100 percent shareholding. Rita will then be asked to pay Pete maintenance from Rita’s income from Jete Ltd, unless the parties have other assets from which to generate an income to give to Pete.
Simon Diamond is one of five shareholders who each own an equal share in an industrial laundry business Diamond White Ltd. Simon and his wife Debra are getting divorced and Simon’s shares are the only asset of the marriage in addition to the heavily mortgaged family home. As Diamond White’s Articles of Association prohibit shareholders selling shares to a third party without the others agreeing, the court will not transfer a proportion of Simon’s shares to Debra. Instead, Simon will need to pay Debra half of whatever he receives should he sell his shares at some future event and/or order Simon to pay Debra ongoing maintenance from the income he receives from his company.
In short, there is no fixed way of dealing with corporate assets on divorce although there are some generalisations:
Most divorcing couples do not want ongoing business ties post-divorce and it is generally seen as being detrimental to a business were it to happen.
The court will only transfer one spouse’s shareholdings to the other spouse when there are insufficient other assets to divide and/or it is too difficult to attach a value to the business.
In most cases one spouse will end up with the share shareholding with a lump sum and/or periodical payments being paid the other way. If there is insufficient liquidity to pay the other spouse a lump sum then a deferred lump sum to be paid when, the shareholding is sold may be ordered.
An order of sale of shares on divorce is rare because in such cases a sale brings the income stream for the family to an end.
Tom Farley-Hills, family law partner at Harbottle & Lewis
Main picture @WikimediaCommons
