LEGAL SERVICES


Your business and divorce


By Glynis Wright (pictured), Head of Practice at Glynis Wright & Co Family Solicitors - Leicester


It is a fact that 42% of all marriages fail and complex negotiations then take place to achieve a settlement of the matrimonial assets. But did you know that businesses are regarded as matrimonial assets just as much as houses and pensions? As a divorce lawyer that specialises in this


area, I am commonly faced with disbelief from my clients who are business owners when they learn that their business interests must be taken into account even where the other spouse is not a shareholder. For some, this is their worst nightmare because the business shares could be the most valuable asset in the marriage. So how do business interests get dealt


with in the divorce process? In the first instance, the business is likely to be valued. Usually, the company accountant will be requested first to provide their view as to what the shares are worth. However, this valuation is frequently disputed by the other spouse who usually argues for an independent accountant to value the shares. Since valuing a business is an art rather than a science, it is not uncommon for two accountants to produce two different valuations which makes the divorce settlement even more complicated. Which accountant is more accurate than the other? In the most complex or intractable cases where compromise or agreement fails, court proceedings are issued for a judge to decide. If an agreement can be reached about


what a business is worth, the problem then arises as to how the other spouse’s claims against the business can be settled. The matter of how much liquidity exists within the business is scrutinised. Consideration has to be given to the rights of other shareholders and whether they may oppose business capital being drawn out as this could impact on future growth plans. If liquidity is an issue, then we look to


see if the claims against the business can be settled by offering the other spouse more than 50% of what we lawyers call the “copper-bottomed assets” of the marriage such as houses or cash in the bank in order to preserve the business interests intact. This is called “off-setting.” Much more commonly, if the marriage is


a traditional one where one spouse is the breadwinner and the other is the main carer of children, it may be possible to agree that spousal maintenance gets paid to the other spouse (on top of child maintenance) instead of capital out of the business. Since spousal maintenance is funded by dividend income received by the breadwinner, it is


often argued that if a capital payment for the business was made in addition to spousal maintenance, this would be “double-counting” meaning the spouse should get one but not both these benefits. In many divorce cases, business interests


will be settled by offsetting or by paying spousal maintenance, but it really does depend on how much the business is worth. The greater the value of the business, the more likely it is that it will not prove possible to protect the business entirely against matrimonial claims and share transfers or share sales have to be considered. So, is there anything that can be done at


the outset to protect the business ahead of the possibility of divorce? The answer is yes. If you are contemplating marriage, you should consider entering into a pre-nuptial agreement that ring-fences the business interests. Pre-nuptials can still be set aside by the Court but there is no doubt that they carry far more weight, if properly drafted, than they ever have before. You should also think very carefully before


gifting shares to your spouse during the marriage. Accountants usually advise gifting shares for the tax benefits that arise, but it can also strengthen the other spouse’s arm in relation to the business if there is a divorce. What you need to do is carefully weigh up and decide whether you wish to opt for the tax advantages, or whether you prefer to play it safe just in case the marriage breaks down. Think hard before making the other


spouse an employee of the business. Sometimes business owners think they can simply terminate their spouse’s employment on divorce but this is not true. A spouse has the same rights as any other employee and you may be faced with having to pay redundancy and/or the need to enter into a compromise agreement before employment can be terminated. Finally, what you must not do is seek to


change anything within the business if you think you are going to face divorce – for example transferring shares to a family member for safekeeping. Any changes would probably be picked up on a forensic analysis and could get you into really hot water if your spouse satisfies a judge that you made those changes in order to defeat their claims. The Court can impose stringent penalties for this kind of conduct. All in all, this is a highly complex area of


family law. If you are a business owner and you need to find out more, take advice from a family lawyer that specialises in finance settlements on divorce.


business network April 2019 63


FEATURE


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