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Family business divorce – Will we need to sell the golden goose?

Jun 17, 2021

If you, or your spouse owns or has an interest in a company and you have decided to get divorced, you may be concerned about what might happen to the golden goose.

A company is what is known as a ‘separate legal entity’. This means that a company has its own ‘legal personality’ and is responsible for its own debts, can own its own property, enter into contracts and can sue or be sued. There is said to be a ‘corporate veil’ or barrier between the company itself and the company’s owners (its shareholders).

Generally speaking, this means that the court would be unlikely to order a company to transfer or sell assets as part of financial proceedings stemming from divorce. This is because such assets are owned by the company and not by the spouse, and the company is not usually a party to such divorce proceedings.

The Court could however, order the transfer of assets which belong to the parties themselves. For example, the Court could order the transfer or sale of shares in a private limited company owned by one of the parties or the sale of the company. It is also common to have companies which include spouses as shareholders (despite one spouse not being heavily involved in the business), usually to utilise tax reliefs. However, where this is the case, your spouse’s involvement with the company may strengthen his or her claim on divorce and further complicate the financial situation should you get divorced.

While the courts can order the sale of a company, this is unusual; forcing a sale has the potential to halt a main source of the parties’ future income.

Wells Sharing

The court may also order a division of assets ‘in specie’ in order to aid a fair financial settlement.

Sometimes referred to as Wells Sharing after the case Wells v Wells [2002] EWCA Civ 476, this results in both parties holding shares in the company post separation. The shares are transferred in their current form and not for their cash equivalent, i.e. they are transferred without ‘liquidating’ them.

In this case, the Husband held over half of the shares in a company, while the wife had a ‘comparatively modest holding’. The company had been earning a profit when they separated, but the performance then ‘declined dramatically’ resulting in an operating loss.

The Judge tried to value the Husband’s shares, considering various valuations, but was unable to. On appeal, the court were concerned by the security the Wife had achieved compared to the risks the Husband faced as a result of the Judge’s allocation of assets. The Court said that because the shares were impossible to value, they were merely an ‘uncertain’ income source for the Husband.

Effectively the court were of the view that sharing in a case like this can be achieved by dividing both the ‘copper-bottom’ assets (less risky assets like property and cash) and ‘illiquid and risk laden assets’ like the company. In this case, both Husband and Wife retained shares in the company. Retaining an interest in a company alongside your former spouse may be far from desirable for some parties – however, this would mean at least, that both parties would be subject to either increase or loss as a result of economic downturn.

Valuation

The court can also fix a value for the shares in a company. Such value can then be used for example, when off-setting other assets in place of the other spouse’s interest in a company or when making a lump sum order to assist achieving equality within the financial settlement. It is also possible for the court to order maintenance to be paid to a spouse due to the income the other spouse derives from such a company.

Of course, valuing shares in a company is not always as simple as we would hope, particularly during times of economic uncertainty.

As well as possible disagreement between the parties to the financial proceedings on who should carry out the valuation, it may be difficult to convert a company’s assets to cash, i.e. establish its liquidity. As a result, an expert accountant or the court may reduce the value attributed to the company when making a valuation. If the court then also considers that the company is ‘risky’, they may award that spouse more of the other assets in the total ‘pot’ to account for the risk involved in retaining the company. This carries with it the danger of double accounting.

Further, what if the spouse owns less than 50% and therefore does not have control of the company? Should the expert apply what is known as a ‘minority discount’ to the value of the shares to reflect this fact? This can vastly affect the valuation. What if the value of the company has changed between separation and the final hearing for the financial settlement? What if one spouse argues the shares should be classed as non-matrimonial assets and therefore should not be shared with the other spouse? These are all considerations the court may make when considering a financial settlement.

When could a company be ordered to transfer or sell assets?

There are some exceptions and situations where the Court may order a company to transfer or sell assets:

Sometimes, people will transfer assets like a family home, into the name of the company.

In this instance, case law tells us that the Court can order the transfer of this asset, even though it is ‘owned’ by the company. This is because the Court views the asset e.g. the family home, as being held on trust by the company for the benefit of one of the parties. The company is merely a ‘bare trustee’.

The Court can also order the sale or transfer of assets owned by a company where the aforementioned ‘corporate veil’ can be pierced. It should be noted that this will only happen in very rare circumstances and only ‘where necessary to achieve justice’ per Petrodel Resources Ltd v Prest.

One such example of this is Akhmedova v Akhmedov [2018] EWFC 23. In this case, the Court made orders against Mr Akhmedov’s companies and its assets, despite the principle of companies having separate legal personality. Mr Akhmedov had used companies to hold assets on his behalf, to effectively evade legal rights which his former spouse had against the assets.

Recommendations for family business divorce from a Corporate Law perspective

Shareholders of a company may consider including provisions within the Company’s constitutional documents (i.e. the Articles of Association), or within a shareholders agreement, which provide for what is to happen to the shares in a divorce situation where the shareholders include spouses.

This could include, for example:-

  1. pre-emption rights of transfer (providing other existing shareholders with a right to first be offered sale or transferring shares from the departing spouse);
  2. having different classes of shares within the company (i.e. separate voting and dividend rights for those managing the business, and those not heavily involved);
  3. or provision that the spouse of a shareholder (who is not also a shareholder) is not entitled to receive shares in the company on divorce.

Even where such provision is made, the Court are still able to make orders in relation to the company on divorce. However, where these provisions are made (and especially where additional shareholders not a party to the divorce are involved), the Court may be more inclined not to order the sale or transfer of shares on divorce.

So will you need to sell the goose that lays the golden egg?

There is no hard and fast rule. The Court has the ability to order the transfer of assets owned by the parties to the financial proceedings and to order the sale of a company though this is likely to be rare.

As explored, in narrow circumstances, the Court has the ability to order the transfer of assets owned by a company a spouse has an interest in.

Coleridge J has made it clear in N v N (Financial Provision: Sale of Company) [2001] 2 FLR 69 that “I think it must now be taken that those old taboos against selling the goose that lays the golden egg have largely been laid to rest; some would say not before time. Nowadays the goose may well have to go to market for sale.”

You can visit our Corporate Law page or our Family Law page for more information. Alternatively, you can use our contact form for further advice on family business divorce.

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter. 

Melissa Deutrom

Melissa Deutrom

Solicitor, Corporate and Commercial Law

Aaron O’Malley

Aaron O’Malley

Senior Solicitor, Family Law

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