For small and medium-sized business owners, divorcing or separating from a partner poses significant threats to the ownership of their company and its effective management. The existence of the business may also affect the terms of the divorce settlement.
During divorce proceedings both partners are required to disclose all assets and liabilities from the outset. Any attempt by a business owner to mask the true value of his or her business can attract significant penalties. Manipulating revenue and/or profit levels or attempting to ring fence and protect all or parts of the business from the pool of matrimonial assets are likely to attract sanctions.
Disputes in divorce cases involving a business or shares will often centre around two issues, namely the value of a business, or of shares in a business, and whether one partner is predominately responsible for the success of the business.
In the case of one couple, Sorrell v Sorrell (2005), the husband purchased a small manufacturing business and turned it into a market leading company. When he separated from his wife the judge considered his business acumen and entrepreneurial flair to be the fundamental reason for the company’s success and decided this warranted a lesser than equal payment to the wife.
In valuing a business courts are likely to expect expert assessment that considers past and current success as well as potential future earnings. Whilst these valuations will not form the basis of a settlement they will assist the court in deciding whether a proposed settlement is fair.
Regardless of the nature of any disputes, business owners will be comforted to hear that in all divorce cases involving a business, the judge’s aim will be to facilitate the survival of the business as a going concern. In the case of F v F (2003) the wife demanded a large lump sum from her husband as well as half his pension. The judge decided that rather than sell his company to fund the payment to his wife, the husband should instead make affordable on-going maintenance payments.
Where both partners own and manage a business but are unable to reach an agreement as to who shall relinquish ownership, the court can order one shareholder to transfer their interest in the business to their partner, and or any other shareholders.
A formal sharholders’ agreement will protect a business owner where they have previously transferred their shares to their partner for tax or other reasons. Under the terms of the agreement the business owner will be able to continue to manage the business and can demand their shares are transferred back to them. Where there is no such agreement in place the business owner’s partner may be able to maintain control and ownership of the business until the divorce is settled and assets divided.
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