The court will distinguish between ‘non-marital’ and ‘marital’ assets. Marital assets are those acquired during the marriage other than by gift or inheritance. Non-marital assets are assets brought into the marriage or acquired after the parties separate. The starting point is that marital assets should be shared equally, and non-marital assets will remain with the owner unless it is necessary to use them (or part of them) to meet the other spouse's needs.

Valuation of business interests

Usually, the court will ascribe a value to an asset at the date of determining the disagreement.

Shares in a private limited company are notoriously difficult to value, and where the parties cannot agree such valuation, the court will appoint a forensic accountant to do so.

There is no fixed approach to valuation, but the most common in the Family Court is the “income approach”, namely converting cash flows (EBITDA) into a single current capital value. There are difficulties with this approach, such as determining any adjustments required to the EBITDA, predicting future turnover and identifying the appropriate multiplier to apply to the EBITDA to calculate the capital value. 

The court will also consider how to account for the illiquidity or risk often inherent in a private company by one of the following:

• Reflecting those factors in a reduction in the valuation of the company or shareholding
• Exercising its discretion to allocate the balance of a family’s resources so that the party receiving the liquid risk-free assets receives less of the overall family wealth, effectively compensating the spouse retaining the illiquid risk-laden assets
• Providing time for the spouse retaining the company to buy out the other spouse

Distribution

On divorce, the court will make a redistributive order, which is intended to achieve a fair outcome. In such an order, shares in a company might be retained by one party and offset against other assets such as cash or property, or there may be liquidity in the company that can be realised to buy out the other spouse (especially if they are also a shareholder).

Alternatively, both spouses might retain a shareholding in the company. This is often a last resort as it compels the former spouses to maintain a financial link, which undermines the ‘clean break’ principle (namely, that the parties have no further financial claims against each other after the divorce). It also creates practical difficulties, such as issues with voting rights.

How best to protect a company in the event of divorce

If a company is started before a marriage (or before cohabitation that leads seamlessly into a marriage) or after separation, then it is likely to be easier to formulate arguments that the pre-marital or post-marital elements should not be shared on divorce. However, this still puts the asset at risk of being required to meet the weaker financial party’s needs.

Accordingly, the best way to protect a company in the event of a divorce is to take practical steps before a separation is contemplated. The most effective step will be for the parties to sign a pre- or post-nuptial agreement that sets out how the parties' assets, including shares, are divided on divorce.

An additional precaution is, especially if there are third party shareholders, liaising with corporate solicitors on inception, to consider the wording of any shareholders agreements, articles and other corporate documents.

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