Family Business Interests & Divorce

If you or your spouse owns an interest in a business with relatives, the financial settlement needs to address that interest without overlooking the rights of everyone else involved. At Laurus, we can help you understand how family business interests and divorce interact, and advise on a settlement that reflects both your financial needs and the commercial position. Contact our family law team to arrange a consultation about your circumstances.

The business interest within the financial settlement

A spouse’s business interest forms part of the financial disclosure required during divorce, even where the business has always been regarded as belonging to the wider family. The court will consider its value and the income it provides when assessing the resources available in order to achieve a fair settlement.

That does not mean the entire business belongs in the matrimonial pot, or that the other spouse automatically receives half the shares. Where a husband owns shares alongside his parents, for example, the starting point is to identify his interest rather than treat his parents’ holdings as his property. The court must then consider how his interest should be treated within the settlement as a whole.

It is important to note that commercial property held by the company does not become the shareholder’s personal property simply because they are a director or exercise substantial control.

Shares inherited, gifted or acquired before marriage

Shares inherited from a parent, or given to one spouse by relatives, may be considered non-matrimonial property, and an interest owned before the marriage may also fall into that category.

The position can become more involved where an established family business has expanded substantially during the marriage. Growth attributable to work undertaken during the marriage may need to be separated from the value of the original interest and passive increases in value.

How the couple treated the interest over time may also be relevant, although using dividends to pay household expenses does not, by itself, convert the underlying shares into matrimonial property.

Valuing a minority shareholding

A spouse who owns 20% of a company may have little influence over whether dividends are paid, and may be unable to find a buyer willing to purchase a holding that offers no control. For example, if a business is valued at £2 million, it does not follow that a 20% holding must be valued at £400,000 for divorce purposes. A valuation may need to take account of the rights attached to the shares and the practical difficulties of selling them.

The actual arrangements matter as much as the percentage shown on the share register. A shareholder may have important veto rights despite owning fewer than half the shares, while a larger holding may carry limited voting rights.

Share restrictions and different share classes

The company’s articles and any shareholder agreement can affect both value and the options available for a financial settlement. It is not uncommon for an agreement to require shares to be offered to existing shareholders before they can be sold elsewhere, and could also contain a provision triggered by divorce.

Although restrictions on transfers should not be ignored, the existence of a restriction doesn’t necessarily establish that the shares have no value. The wording and enforceability of the arrangement will matter, together with what would happen in practice if the shareholder wished to realise their interest.

Different share classes require equally careful attention; one class may carry voting rights, while another receives preferential dividends. In addition, some shares may be valuable if they are sold despite producing little income; so comparing the number of shares held by each relative can give a misleading picture.

Income and benefits from the business

Where a spouse also works in the family business, the court needs to understand their earnings separately from the capital value of their holding. Their salary may be only part of the picture if they also receive dividends or the company meets personal expenses.

A company car, for example, can reduce the employee’s personal expenditure, although its value as a benefit is different from cash available to pay maintenance. The court will need a realistic assessment of the resources available to support each household after separation, rather than relying on the salary figure appearing on a payslip.

Money owed by the company to a spouse by way of a director’s loan may represent a separate asset, whereas money they owe the company may be a liability. The accounts should be examined to avoid counting the same value twice or mistaking borrowing for sustainable income.

Retained profits and dividends

Profits retained within a company are not automatically money that a spouse can withdraw; the business may need reserves to fund its day-to-day trading or meet borrowing commitments. A substantial bank balance could therefore be consistent with a genuine commercial need to retain cash.

Nevertheless, a claim that every available pound must remain in the business should be supported by evidence. Historic dividend payments and current cash-flow forecasts can help establish whether the company could reasonably distribute money without undermining its operations.

An unexplained reduction in dividends following separation may deserve scrutiny, but a change in payments does not necessarily indicate manipulation. Trading conditions may have deteriorated, so the court will need to look at whether transactions are genuine commercial decisions or an attempt to understate available resources.

Independent business valuations

An independent valuation may be necessary where the business interest is significant and its value is disputed, particularly if the accounts do not provide a reliable picture of its current worth.

Within financial proceedings, the court’s permission is required before expert evidence can be put before it, and the evidence must be necessary to assist the court in resolving the case. A single joint expert is often instructed, with questions agreed between the parties or determined by the court.

The instructions should address the matters that affect the proposed settlement, including the value of the holding and the scope for removing funds from the company. If a payment would require a share sale or dividend, the likely tax consequences also need consideration.

Other family shareholders and the proceedings

Relatives do not automatically become parties to divorce proceedings simply because they own shares in the same company. However, their involvement may become necessary where there is a dispute about ownership, or where the outcome sought could directly affect their rights.

Company records may also be needed to establish the financial position, although the scope of disclosure should remain relevant and proportionate. Where relatives need separate advice, recognising this early on in the proceedings can help prevent conflicting interests from causing disruption later.

Our family law team can help you assess the business interest alongside your wider financial circumstances, so that negotiations address both its value and the practical means of meeting a settlement. As a highly rated law firm, Laurus combines clear advice with a practical approach to resolving the issues that matter to you and your family.

Contact Laurus now to request a free consultation with one of our specialist family solicitors.