The divorce of a company director can introduce an additional layer of complexity to divorce financial remedy proceedings. There is a delicate interplay between the court’s duty to find a fair financial settlement and the impact any order it ultimately makes will have on the company. This means judges must engage in a careful balancing exercise to achieve the right outcome. Where divorcing spouses are co-directors of the company – in a family business for example, this exercise can be particularly sensitive.
While courts usually try to keep the impact on the business to a minimum, they must always have regard to the s25 factors when reaching decisions. As with all financial remedy cases there is a large degree of discretion, and each case will be decided on its facts.
We explore some of the issues that arise when company directors get divorced below.
The Employed Director
An employed director, a ‘salaried’ director and certain executive directors essentially carry out the functions of senior employees or company officers. Where they have no other role or interest in the company they are treated in the same way as anyone else getting divorced as far as their employment position goes.
They will be required to disclose full details of their income on Form E. Often this will be simply a case of declaring PAYE income in the usual way. However, assessing income for the purposes of financial remedy proceedings can become more complicated when the salaried director receives other benefits derived from their directorship. These may include performance bonuses, share options and enhanced pension rights.
The duty of full and frank disclosure in financial remedy proceedings also means that any deferred compensation or benefits should also be disclosed. It’s worth noting that a spouse of a salaried director may request copies of the company accounts to verify that all income and benefits have been disclosed.
Directors With An Interest In the company
Where a director who is getting divorced is a part owner of the business, owns shares in it or has other interests relating to it, additional factors are at play. Obtaining an accurate valuation of the company and the director’s overall interest in it will be essential. Only then can meaningful settlement discussions take place or effective financial remedy proceedings be heard. The valuation of corporate interests is notoriously tricky, given the day to day fluctuation in share values and the risk attached to business ventures of any kind.
Additionally the court will have to decide whether the director-spouse’s interest is a matrimonial or non-matrimonial asset. Judges will examine how the business, and the spouse’s interest in it, was first acquired. Was it before the marriage? Did both parties contribute? How has the value increased during the marriage?
Where the director’s involvement in the business predates the marriage, it may be open to the courts to decide it is a non-matrimonial asset and therefore not subject to the general sharing principle governing matrimonial property. Unless required to meet needs, the asset may be excluded entirely from the financial settlement.
What does the director spouse need to disclose?
As in any divorce the parties must make full and frank disclosure of their assets on Form E.
For directors the kind of information required will include:
- Salary, bonuses and other benefits
- Company accounts and valuation
- Details of dividends received
- Precise shareholding and rights attaching to shares
- Value of shares
- Any interest in related companies
- Assessment of company’s future performance
The crucial point here is that the director spouse must provide enough detail to enable their spouse – and the court – to understand the nature of the ownership and its value.
What happens if the value of the director’s interest is disputed?
Disputes over company valuations are not uncommon. They can prolong proceedings and lead to additional expense because of the need to involve the courts in additional hearings and instruct experts. In H v H (2008) Moylan J declared that the valuation of private companies is ‘among the most fragile valuations which can be obtained’. He highlighted the following:
- There is likely to be no obvious market for a private company
- Even where valuers use the same method of valuation, they are likely to produce differing results
- The profitability of private companies may be volatile. A snapshot valuation for the purposes of financial remedy proceedings may give an unfair picture
- There may be a substantial difference between the value of an asset ascribed to it by an expert and the liquidity of that asset (where attempts are made to extract the value from a company in cash)
- The acid test of any valuation is exposure to the real market. In the context of divorce this is rarely possible
The court’s task when dealing with a dispute over the value of a director’s interest in a company is therefore a difficult one. Judges must find a solution that is creative enough to meet the needs of the applicant spouse without damaging the business and undermining its value.
Divorcing Co-Directors
Where the spouses getting divorced are co-directors – of a family business for example, keeping the business operating smoothly during proceedings must be a priority. In a case where the relationship has become fractious, care must be taken to avoid a deadlock position where each spouse owns 50% of the shares and has equal voting rights.
It is important to remember that legally the company is a separate legal entity. The Court does not have the power to treat it as any other family asset. The spouses, irrespective of the divorce proceedings will still be under strict fiduciary duties to the company in their capacity as directors.
Careful thought must also be given to how the company will operate post-divorce. Will the estranged spouses be able to work constructively together or will it be necessary for one spouse to buy the other out? If a decision is taken for both to remain involved in running the company, a fresh shareholder’s agreement should be drawn up and key company documents reviewed.
What orders can the court make?
Often director spouses are concerned with the extent to which they will be able to keep control of their business after divorce. In reaching a decision that is fair, courts will want to avoid the commercial damage to a successful business that could be caused by, for example dividing it between the divorcing couple or forcing a sale that makes little commercial sense.
The final order will depend on the circumstances of the case. Orders that are available include a lump sum payment to the applicant spouse in lieu of the business interest, transferral of business property to one spouse, a share or asset sale to fund a settlement and deferred payments based on future business performance.
Comment
When a divorce involves a company director the financial remedy proceedings can be complicated because of the need to establish how much the business is worth, the extent to which it is a matrimonial asset and how any value due to an applicant spouse can be realised without harming the business.
By getting specialist legal advice early on, steps can be taken to protect the business on the one hand while ensuring that any settlement meets the essential criteria of fairness to both parties.