The Family Business Upon Divorce

News Article

It is not unusual to have a family business that forms a large part of the divorcing party’s assets. The difficulty is how the business is to be divided a subject that is causing considerable legal debate.

A typical family business has the husband as the person who has developed the business with the wife assisting on the fringes (the reverse may be the case.) The business is usually heavily based on one side of the family and was started with modest financial means. The wife generally has a minority shareholding with voting rights which up until now have been exercised in accordance with the husband’s wishes. Profits have been drawn as have bonuses with new cars being purchased for each party every 2 years. The majority of the assets will be owned by the company therefore cannot be sold and are required to enable the business to continue.
The main difficulty that arises is how to value the business and how to divide the illiquid business assets.

The case of White v White [2001] 1 AC established new expectations that assets should be divided on a fairer , equal division basis however this does depend on the individual facts of the case and is not set in stone. Equality can be difficult to achieve when the wealth is tied up in a business. If possible it is preferable to leave the business in tact and off set its value against the other assets. I.e. the house, savings, shares, endowments etc. The wife can retain the majority of the liquid assets and will transfer any of her interest in the business to the husband in order to achieve an equal division. Off setting allows a clean financial break to be achieved between the parties

If there are insufficient assets to achieve equality between the parties other finance methods may be required. Funds can be raised against the business to pay a final lump sum settlement to the wife. If insufficient funds can be raised a one off final settlement may not be possible however the Court is still reluctant to divide the business and sell the assets. Providing the business continues trading successfully further lump sum payments can be made to the wife. The Court can order various lump sums to be paid and specify how and when these instalments are to be made. Once the final instalment has been made a clean break can be affected.

It is usually in both parties’ interests for the business to continue trading as that is the family’s source of income. If the business is sold a huge lump sum will be realised but what about the future? Provided the parties agree any number of settlements can be achieved. If an agreement cannot be reached the Court only has limited powers under Part II of the Matrimonial Causes Act 1973. Depending on the circumstances it is preferable to use offsetting however if not financially viable it may be that the business along with the other assets is simply divided down the middle.