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What happens to a company in a divorce?

When Bill and Melinda Gates announced their separation, it wasn’t long before speculation began to ramp up about what their settlement might look like.

Of course, details haven’t been disclosed of the division of assets. Statements the couple released said they would continue to work together at their philanthropic foundation; however, it was reported Cascade Investment, a holding company Bill Gates created, transferred securities worth more than $1.8billion to his wife shortly after the announcement.

No doubt there’ll be much for the couple to unpick, but closer to home, what happens here with companies when a couple decides to divorce

Each case turns on its own facts, but let’s look at a fairly typical example.

Susan and David — in business together

Susan’s a mud engineer in Aberdeen.

She’s been working as a contractor in the oil and gas industry for the past seven years. She’s been married to David for the past ten.

She set up a private limited company — Muddrillco Limited — right from the start. She pays herself a salary and dividends. Her husband was brought into the business three years ago as a shareholder. He’s not involved in the day-to-day running of things at all, but his appointment does mean the family can draw more income before tax, and higher rate tax, kicks in.

Sadly now, they’ve decided to get divorced.

What happens to the company? How should it be treated in the divorce? And David’s not been involved with the organisation at all, so is he entitled to half?

Let’s take a look.

Handling finances in a divorce

Luckily, the law in Scotland is well established when it comes to how finances should be dealt with.

The Family Law (Scotland) Act 1985 says the ‘net value of matrimonial property’ should be shared fairly. A common misconception is that that means a 50% share for both spouses.

Instead, that’s the starting point. Any special circumstances — including prenuptial agreements and the source of funds used to buy the matrimonial home — will help determine if other proportions are justified.

And that principle extends to shareholdings or interests in companies.

When is a company matrimonial property?

The rule of thumb is if an asset has been accumulated during the marriage, with some limited exceptions, it’s matrimonial property and will need to be considered as part of that fair division.

As such, if a spouse buys shares in or sets up a company during the marriage then it will be classed as matrimonial property. Likewise, if the other spouse acquires shares or business interests in the same company during the marriage, those would be viewed in the same way.

In Muddrillco Limited’s case then, both Susan and David’s business interests would be considered assets and would be added to the matrimonial property pot for dividing as part of the divorce.

In another scenario, if only Susan was a shareholder in Muddrillco, but she was appointed during the marriage, it’s still considered matrimonial property.

Conversely, if she had set up company before she got married and hadn’t appointed David a shareholder, then it’s unlikely it would have been regarded as matrimonial property. That said, there’s nothing to stop David arguing against some of the value of his wife’s interest if, for example, he gave her money to buy the shares.

Valuing Muddrillco Limited

Company valuation in divorce depends on an organisation’s size and nature.

For complex or larger set-ups, we might ask an independent accountant to step in.

Otherwise, and most likely in the case of Muddrillco, the most common ways of valuing are to look at the earnings, assets, or dividends.

The date of separation can affect valuation too. For example, if a couple separates in 2014 and continued working together in the company, its valuation would be completely different when looking to sort out finances in a 2021 divorce. In that case, we’d need a date of separation value and a current value.

Tax and company implications

This is a complex area, so Susan and David may well need to be aware there could be a Capital Gains Tax issue on disposal of shares. It’s well worth speaking to a tax expert in this instance.

In Muddrillco’s case, David is entitled to dividends and, if Susan wants to keep the company, she’ll need to buy him out.

Alternatively, if she wants to dissolve Muddrillco, her husband is still entitled to some of the money remaining in the company on dissolution, such as retained profit. But they’d need to bear in mind there are costs to dissolve a company and, again, there could be Capital Gains Tax to pay as well.

What if they can’t agree?

Often the best — and usually less costly — approach is to work with your partner to resolve things without going to court, if you can.

For example, you could explore mediation or other dispute resolution methods. Approaches like collaborative law are becoming increasingly popular as a means of couples retaining control of their divorce and agreeing how to divide assets, such as a private limited company.

If the case did go to court, going back to our example, David couldn’t seek an order against himself so he couldn’t ask to be rid of his shares and be paid for them. He could ask for a sum of money, but the matter of the shares would need to be resolved by agreement.

However, Susan could seek an order in court to transfer David’s shares back to her.

A complex situation

Understandably married clients with business interests are often concerned about claims on those as part of the divorce process. As ever, the best approach is to seek expert family law advice from the outset so you know where you stand and can best protect your interests.

Emma Somerville

Senior associate Emma supports clients, both in and out of court, with a wide range of other family matters, including separation; child residence and contact; cohabitation agreements; adoption; and divorce. Emma also advises on the financial aspects of separation and divorce alongside other family law matters such as guardianship and exhumation. She is a member of the Family Law Association and is a Collaborative Solicitor and member of Consensus Scotland.

Posted, 14 May 2021 by Emma Somerville
Categories: Corporate | Family law | Private client