If you are in business with someone going through a divorce the fear that your co-owner’s changed financial circumstances could threaten your business is understandable. But it’s important to realise that it is difficult for a court to unilaterally make an order in divorce proceedings that could affect third parties such as a business partner. There are also ways your business can proactively try to ring fence the business so that it is protected during the divorce of someone who has a share in it.
Business share as a financial resource
When reaching decisions on finances in a divorce, courts must take into account the factors set out in the Matrimonial Causes Act, 1973. These include the financial resources of the parties. Arguably a share in a business is a financial resource. If the business is owned entirely by one spouse (or it’s owned between the spouses) it will be included in the pot of assets to be divided just like any other asset such as a house or pension. If however the business is owned with non-family members the courts are more restricted in how they can treat it. That’s because of the potential for other shareholders or partners to be adversely affected.
Valuing the business
A value must be attached to the business interest during the divorce process. For some businesses this process is straightforward. For example a service company without fixed assets where only the income needs to be established. Where the business comprises substantial assets such as property or machinery it may be necessary to involve a forensic accountant to attach a realistic value to it.
The valuation exercise may serve simply to establish that, when other assets are taken into account, the business interest is insignificant and does not need to be examined in any detail.
How well established is the business?
Of course there is always the potential for one spouse to place some of his or her assets beyond the reach of the other by investing in a business with an outsider ahead of a divorce. The courts however are likely to view such behaviour as an attempt to hide assets and intervene. And they have a wide discretion to do so. For example, in the 2015 case of Prest v Prest the Supreme Court looked behind a business structure created by a divorcing husband and ordered a multi-million pound property portfolio owned by a company to be transferred to the wife – even though in strict legal terms the company and not the husband owned the property.
Following the decision in Prest some thought courts had much more flexibility to interfere in business in which one party to a divorce owned a share. In reality however where a business is well established with several years accounts and returns available for scrutiny and where there are other shareholders and partners a court is unlikely to interfere in a way that could undermine the business. Although the value of the divorcing owner’s share will be taken into account in a financial settlement.
Can I protect the business in the event of a divorce of a co-owner
There are steps you should consider taking to protect a business in the event of an owner’s divorce. These include:
- amending your shareholders agreement – If the business is a limited company you should ensure the shareholder agreement contains a method for valuation of any shareholding in the event of divorce. The agreement may also specify what shareholders must agree to. For example is shareholder consent required for an interest to be transferred to a shareholder’s spouse
- amending a partnership agreement – If you are in a partnership you should ensure the agreement anticipates the divorce of a partner
- entering Pre-nuptial and post-nuptial agreements – You can increase the chances of protecting your business interests by agreement with your spouse provided the formalities for these types of agreement are observed