Divorce courts

W ith around 40% of all marriages in the UK ending in divorce, employers need to be aware that it is not just the family home and joint bank balance that can be split between husband and wife. Following several landmark court cases, reaching back as far as 2001, it has become clear that shareholdings are treated in the same way as other matrimonial assets and businesses can be severely damaged by divorce.

Earlier this year, Mark Dixon of Regus Group had to raise 28.7m by selling nearly 3% of his shares in the company to fund a divorce settlement. In 2004, Stephen Marks was forced to sell some of his shares in French Connection, reducing his shareholding to 42% and subsequently relinquishing his controlling interest in the high street chain. David Harding, chief executive of William Hill, had to sell almost his entire stake in the bookmakers (5.2m worth of shares) to raise funds for his settlement.

What few HR managers, financial directors or company shareholders realise is that a husband or wife’s shareholding in any company, either public or limited, is an asset which will be taken into account on divorce. It can, in certain circumstances, even be ‘up for grabs’. The fact that the matrimonial court can force a divorcing shareholder to transfer all, or part of their shareholding to their spouse, comes as an unwelcome shock in many boardrooms. The court can, effectively, force the sale of a company or shareholding to fund a divorce settlement, particularly in the case of a ‘clean break’.

The potential impact of a divorcing shareholder in a publicly quoted company may be less than in a private trading company where a value will have to be attributed to the shareholding. In a case in 2001, Mr Justice Coleridge said: “I think that it must now be taken that those old taboos against selling the goose that lays the golden egg have been largely laid to rest… nowadays the goose may well have to go to market for sale.”
The process can, however, be extremely costly and was described by family lawyer Nick Mostyn QC as being “devoid of any science and never more than a guess by an expert”.

Perhaps a fairer solution would be for both husband and wife to retain a mixture of assets. Unfortunately this is not always a viable option due to third party interests, particularly from other shareholders. In the event that shareholders are willing to co-operate with the divorcing shareholder, solutions include: buying out the spouse’s shareholding, raising funds, or funding the settlement by way of a bonus, loan, dividend or buy back. However, all of the above methods will have tax consequences and create substantial administration challenges for the company.

Ultimately, prevention is better than cure and couples should consider entering into a prenuptial agreement in relation to business assets.

Susan Apthorp is a partner and Hero Hodgkinson an associate at KSB Law

Action points for HR

  • HR managers, financial directors and board members should seek legal and independent financial advice to ensure the company is protected. This is particularly important during share transactions and the addition of new shareholders to the company
  • Ascertain the marital position of significant shareholders prior to advising a company or shareholder on anything significant. This is also important when considering a prospective employee looking for a substantial holding or share options as part of their remuneration package
  • Identify whether any shareholders have gifted the beneficial interest of any shares. Although shares may not have been transferred into someone else’s name, they may be held in trust for another person and you should identify this
  • Give careful consideration to the inclusion of buyout clauses in shareholders’ agreements, as well as removing or imposing restrictions on share transfers, which, in turn, may prevent shares being transferred to a spouse
  • Aim to have a transparent, flexible company structure – this will provide shareholders with some certainty and ensure shares can be sold easily within the company or elsewhere.

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