The breakdown of a marriage is always difficult but it can be particularly difficult if the couple are both shareholders in a family business.
There are a number of issues which should be considered at an early stage, several of which are dealt with here and here. Once the value of the company has been ascertained, however, and allowance has been made for the inherent risk involved with some businesses, consideration must then be given to the practicalities going forward.
The appropriateness of the various options is dependent upon the specific circumstances of each couple, including the nature of the business, each party’s involvement with the business and alternative earning capacity, the parties’ ongoing relationship, the number of shareholders, the availability of other (matrimonial) assets and the liquidity of the company. It is important to receive legal advice as early as possible in order to assess the options available for the divorcing parties – and more generally for the company.
Both remain shareholders
The Court is generally very reluctant for spouses to remain tied up in a company together, however in some limited circumstances it is possible for this to succeed. It could be particularly relevant if both parties are heavily involved with the family business, have limited options in terms of alternative forms of employment, and have a good working relationship. In such circumstances, we would strongly advise a detailed shareholders agreement which regulates how the company is to be run, to minimise conflict. Our experienced Corporate Team can work with us in order to ensure the greatest level of security for the shareholders and for the company.
Share transfer
If it is decided that only one party should remain a shareholder, it is possible that the exiting spouse’s shares can be transferred to the remaining spouse. If this is to take place, however, there should be sufficient matrimonial assets to ensure that the exiting spouse is compensated for relinquishing their interest in the company. There may be tax consequences upon the share transfer, however, so accountancy advice should be taken as early as possible, to mitigate any liability.
Buyback
In some circumstances, it is possible for the company to buyback the exiting spouse’s shares in the company. Input from accountants is again imperative, as they will be able to advise as to the viability of this option. If there are additional shareholders, their input is likely to be required in order to authorise the buyback, not least because the overall share structure of the company is likely to change as a result.