By Vanessa Lloyd Platt
The value of a family business owned by one or both of the parties will always be taken into account by the Court when it considers what financial orders to make upon a parties’ divorce.
Precisely how the Court will deal with the value of a business will depend on the individual circumstances of each case. For example, a family run business going back generations will be treated entirely differently to one created during the course of the marriage, and to which both parties have contributed.
In the latter case, it is likely the parties will be considered to be entitled to an equal share of the value of the business due to it being regarded as “Matrimonial Property”. In the former case, it is far more likely to be seen as wholly Matrimonial Property and the Court’s jurisdiction will be fully brought into account to consider whether a proportion of this should be awarded to the other party. This consideration will be based on the needs of the parties rather than on the principle of sharing.
The usual outcome in a case involving a business is that the business is left entirely to one party while the other party receives other assets, such as cash or property. In the groundbreaking case of Wells v Wells, the Court said that while it is intended to arrive at a clean break between the parties i.e., a full and final settlement, sharing is achieved by a division of both the copper bottom assets and the illiquid and risk laden assets.
What this means is that one party should not be given all of the risk-laden assets in a divorce settlement, leaving the other one with house and liquid assets. It would be unfair to load risk onto one party and not the other. The Court will therefore consider all of the nature of the assets so that there is a fair division of both the capital, cash, properties etc and may discount the value of an illiquid asset as it contains a risk for the party who holds them.
It is rare for both parties to retain shares in the same family company. In a case in 2017, known as WM & HM, Mr Justice Mostyn describes the transfer of shares in the husband’s company to his wife as a matter of last resort and antithetical to the clean break. This means that cases should work towards parties’ independence but by transferring the shares the wife was forever connected.
In any case before the Court, they would need to know the value of the business. In the first instance, on documents of disclosure known as Form E. The party who owns the business will be asked to set out what they consider to be the value of the business. Mostly these are accurate if it is undertaken on the advice of the party’s accountant.
Sometimes, however, parties will try to deliberately undervalue their business or state that the business has no value at all. If clients believe that this is untrue, then this firm will usually consider applying to the Court for the appointment of a forensic accountant, either on a sole basis or jointly with the other party, to value the business, consider the earnings that could flow from it and the ability of one party to raise funds from the business in order to pay to the other.
Difficulties can arise if the parties have set up and run the business together throughout the marriage, and the issue then arises as to who should retain the business or could the parties continue to remain in the business and run the same for the foreseeable future. Further options are that the business may have to be sold or that one party will buy out the share of the other. It is in the latter case that it is very important to establish the true value of the business that is being sold out to the other party.
If parties are to retain in the business as part of a divorce settlement, it is very important to consider what can be done to ensure that the other party does not try to dilute the value of the shares that are being held by either issuing further shares of a different nature or any such other actions.
This firm will carefully consider with each client these issues, in particular if there has to be any other agreements put in place to protect the shares retained in a company on divorce.
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