For many family businesses and owner-managed companies, the line between personal life and work life is not always clearly defined. While this can be a strength in terms of long-term commitment and shared objectives, it can also create risk where personal relationships change.
Divorce is one of the most common (and potentially disruptive) events affecting business ownership. Where shares in a company are held by an individual who becomes involved in divorce proceedings, those shares may be taken into account as part of the overall financial settlement.
Understanding how the courts approach business assets, and taking steps in advance to manage risk, is an important part of business succession planning.
How business assets are treated on divorce
In England and Wales, the court has a wide discretion when determining financial settlements on divorce. The objective is to achieve a fair outcome, taking into account factors such as the needs of the parties, the standard of living during the marriage, the contributions made by each party and the welfare of any children.
Shares in a business are generally treated as a financial resource and may be considered alongside other assets, such as property, savings and pensions. This does not necessarily mean that shares will be transferred to a spouse. However, their value will often be taken into account when assessing how the overall assets should be divided.
Valuation of business interests
A key issue in divorce cases involving business owners is how the business is valued. This can be complex, particularly for owner-managed businesses, where value may be closely linked to the involvement of the individual shareholder. Valuation may involve consideration of the company’s financial performance, assessment of future earnings and input from independent experts. Disputes over valuation are not uncommon and can add both time and cost to proceedings.
Risks for the business and other shareholders
Where one shareholder is involved in divorce proceedings, the impact may extend beyond that individual.
Potential risks include:
pressure to realise value from the business to fund a settlement;
disruption to management if key individuals are distracted;
uncertainty for other shareholders;
the possibility of shares being transferred outside the existing ownership group.
While the court will generally seek to avoid outcomes that undermine a viable business, there is no guarantee that the interests of the company or other shareholders will take priority.
The role of shareholders’ agreements and articles of association
A shareholders’ agreement and the company’s articles of association can provide an important layer of protection. While these provisions cannot prevent the court from taking the value of shares into account, they can influence how ownership is structured following a settlement. For example, they can include restrictions on the transferability of shares that may make it more likely that shares are retained within the existing shareholder group, with the non-owning spouse receiving other assets instead.
Consideration should also be given to any valuation provisions contained in these documents and how they might impact a financial settlement. While such provisions may provide a useful framework for assessing the value of shares, the court is not bound to apply them when determining a financial outcome on divorce. Instead, the court will typically consider all relevant evidence, including any expert valuation obtained within the proceedings, and exercise its discretion to achieve a fair result. In this context, valuation mechanisms set out in shareholders’ agreements or articles of association are likely to be treated as a relevant factor, rather than a determinative one, particularly where they do not reflect the reality of the parties’ financial circumstances.
Pre-nuptial and post-nuptial agreements
One of the most effective ways to manage risk is through pre-nuptial or post-nuptial agreements. These agreements allow couples to set out how assets, including business interests, should be treated in the event of divorce.
While not automatically binding, such agreements are given significant weight by the court, provided they have been entered into freely, with appropriate disclosure and independent legal advice.
Structuring ownership
The way in which shares are held can also influence the position on divorce.
For example:
shares held within a trust structure may offer a degree of protection, depending on the circumstances;
different classes of shares can be used to separate economic rights from control;
gradual succession planning may reduce the concentration of value in a single individual.
These approaches require careful consideration and should be implemented as part of a wider legal and tax strategy.
Balancing fairness and protection
In family businesses, there is often a need to balance competing priorities. On the one hand, there may be a desire to protect the business and ensure continuity of ownership. On the other, there is a need to achieve a fair outcome between spouses.
The court will ultimately seek to balance these considerations, but clear planning can help shape the available options. For example, where alternative assets are available, it may be possible to meet a financial settlement without transferring shares in the business.
Practical steps for business owners
Business owners may wish to consider the following steps:
reviewing existing shareholders’ agreements and articles of association to ensure appropriate protections are in place;
considering whether pre-nuptial or post-nuptial agreements are appropriate;
taking advice on the use of trusts or other ownership structures;
ensuring that wills and succession plans are aligned with these arrangements.
Taking action at an early stage is generally more effective than attempting to address issues once proceedings have begun.
A joined-up approach
Divorce is, by its nature, a personal matter, but its impact on a business can be significant.
A coordinated approach involving corporate, private wealth and family law specialists can help ensure that the business is appropriately protected, the interests of all parties are considered and the risk of disruption is minimised. For family businesses in particular, this joined-up approach is an important part of effective business succession planning.
Planning ahead
While it is not always comfortable to consider the possibility of relationship breakdown, doing so can help protect both the business and the individuals involved. By putting in place appropriate structures and agreements, business owners can reduce uncertainty and provide a clearer framework for dealing with change.
If you would like to discuss how to protect your business interests in the context of divorce, please contact BPE’s Family team by clicking here. Our coordinated team can point you in the right direction for all of your other business needs too, with the help of our Corporate and Private Wealth teams.
