Amongst the many inherent emotional and practical challenges that come with divorce, couples seeking a fair division of their business assets can face an added degree of complexity, not least because the definition of ‘fair’ can be very subjective when it comes to business interests. In these cases, understanding how business assets are treated during divorce proceedings becomes a crucial starting point.

Defining Business Assets in Divorce

When it comes to divorce proceedings, what are business assets and could they, or should they be taken into consideration? Couples grappling with these fundamental issues should know that their business assets could include physical property, intellectual property, shares, investments, and even goodwill in a business. It may be that these assets belong to one spouse, are jointly owned, or are part of a family business. The principal question is whether the business is considered a marital asset. Generally, any asset acquired or grown during the marriage is considered marital property, but complications can arise when distinguishing personal and business finances.

The Value of Business Assets

Before determining the division of any business assets, a proper valuation needs to be established. As the overall financial settlement relies on these figures, an accurate valuation is all important. Typically, professional valuers, such as forensic accountants, can be instructed to provide an impartial assessment. In reaching a valuation, they consider various factors, including:

Market value: The price the business would achieve if sold.
Asset value: The value of physical and intangible assets.
Earnings and profit potential: Future income streams and profitability.
Debts and liabilities: Any outstanding debts, including tax liabilities, that impact the net value.

The Effect of Asset Division on Business Operations

The method of settlement in the asset division could potentially impact the daily operations for a business or affect its financial standing and so must be factored into the consideration process. Typical options for consideration include:

Cash payments: Liquid capital is required for one spouse to buy out the other's share, which could cause a strain on the business and may impact cashflow for example.
Transfer of shares: Strategic business flexibility, in terms of control and decision-making, should be considered when opting to transfer shares to the non-owning spouse, and so this is rarely the solution.
Ongoing payments: Future profits may be reduced by opting for spousal maintenance or dividend payments, if this avenue is pursued. Recognition of the risks and shortcomings in this solution is vital.

Additional Legal Considerations

To reach a ‘fair’ settlement, UK courts will take into account the individual circumstances of each case. Some of the key factors influencing the division of business assets include:

The contribution to the business: Both financial and non-financial contributions by both spouses will be considered by the court. Whether one spouse was managing daily operations whilst the other indirectly supported the business, or the contribution was structured another way, these contributions will be accounted for.
The needs of both parties: Each spouse will have their own set of resources and financial needs that the court will take into consideration. Particulars of these needs may include child support, housing needs and living expenses. This is fundamental.
The length of the marriage: A more equal division of assets is usually considered in longer marriages. Time spent living together prior to marriage is also a consideration in determining the ‘length’ of the marriage, despite the strict letter of the statute.
The standard of living: If at all possible (where the assets of the divorce can support it) the court will aim to maintain a similar standard of living for both parties post-divorce. Where this is not possible, meeting the needs of both parties will be the priority. As a general aspiration this has been recognised as being something often unachievable.

Protecting Your Business Assets

Whilst the court will always include the considerations above in the first instance, there are other factors which cannot be disregarded in reaching a fair division. These include any steps that have been taken already to ensure clarity and agreement in advance of any potential divorce. These include:

Prenuptial or postnuptial agreements: Nuptial agreements such as this can identify how business assets should be treated if the marriage ends, providing transparency between parties and agreed intention of the asset’s protection ahead of any such event.
Shareholder agreements: Clauses can be included to restrict the transfer of shares upon divorce, and in doing so, protect the business from unwanted changes in ownership or control.
Separate business and personal finances: Spouses who maintain distinct boundaries between personal and business finances can help to demonstrate to a court that no ‘grey areas’ exist that can reasonably be interpreted as business assets being marital property.

Expertise and Legal Guidance

Antony Clapp Solicitors has a team of family law experts who are experienced in dealing with complex financial settlements, business asset division and advising clients on all the considerations in divorce and financial matters.

Conclusion

Divorce is a challenging process, and the inclusion of business assets adds another layer of complexity. Understanding how these assets are valued, divided, and the potential impact on business operations is crucial for business owners. With careful planning, legal protections, and expert advice, you can navigate the division of business assets in a way that seeks to preserve both your business and personal financial stability.

How Will The Court Divide Business Assets?

When it comes to dividing business assets during divorce, UK family law has been shaped by several landmark cases which have helped to establish guiding principles the court looks to in deciding fair settlements.

White v White [2000] marked a distinct change in how business assets are treated in divorce settlements. In this case, the husband owned a farming business, but the wife had made significant contributions. The House of Lords ruled that both parties’ contributions should be considered equally, with no advantageous bias to the breadwinner of the two. This was known as the introduction of the ‘yardstick of equality’ principle, and it has set a precedent for including business assets in the matrimonial pot and dividing them fairly.

In high net worth divorces where business assets and future earnings are important considerations, the combined cases of Miller v Miller and McFarlane v McFarlane [2006] should be identified. Here, the House of Lords emphasised three guiding principles: to meet both parties' needs, to compensate for any economic disparity caused by the marriage, and to fairly share assets accumulated during the marriage. These principles now guide courts in considering not only existing business assets but also future earning capacity.

The Court of Appeal upheld a substantial award to the wife in the case of Charman v Charman [2007] which involved the division of a significant business fortune amassed by the husband during the marriage. The outcome reinforces the principle that business assets acquired during marriage are subject to equal division, regardless of who contributed more directly to their accumulation. This case affirmed that exceptional contributions to a business do not necessarily warrant departure from the equal sharing principle.

Complexities arise when considering the value of a business built both before and during a marriage, as seen in Jones v Jones [2011]. Simplistically in this case, the Court of Appeal determined that the pre-marital value of the business should be excluded from matrimonial assets, while the increase in value during the marriage was subject to division. This ruling marks the important distinction between pre-marital and marital business assets and evaluates each spouse's contribution to the business growth during the marriage.

In the case of Cooper-Hohn v Hohn [2014] the court awarded the wife a substantial portion of the business assets from a successful hedge fund, recognising her indirect contributions to the family and support of the husband's business activities. This ruling reiterates the value placed on indirect contributions, such as managing and maintaining the household and supporting the breadwinner husband in this case.

Together, these cases illustrate how UK family law addresses the complicated issue of dividing business asserts to emphasise the principles of fairness, to recognise both direct and indirect contributions, and to consider the relevance of each unique set of circumstances. Divorcing couples with business asset considerations should seek early and expert legal advice to gain a view on how the courts might treat their own particular issues.

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