Wed 29 Jan 2020

Restructuring your business? Why you might need to speak to a divorce lawyer…

As those management gurus who post continually on LinkedIn are always saying, change is the only constant in life. Business is no exception. If you hold a significant shareholding, in your own or someone else's business, it's not uncommon for there to be some kind of restructuring or reorganisation of that business at some point e.g. on merger or recapitalisation.

Chances are that when you pick up the phone to ask your corporate solicitor about this, it won't cross your mind that you might also need to have a word with their family law colleague. However, if you're married or in a civil partnership, changes to your shareholdings may affect your finances if, sadly, you and your spouse were to separate. It's useful to be alert to this long before anything goes wrong, as there may be ways to protect yourself in advance.

The reason this is important is because of how the law defines the assets to be shared between spouses when they divorce (the same approach is taken for civil partners). The first step is to establish the nature and value of the "net matrimonial property" at the date of separation. The "net matrimonial property" means any asset acquired after the date of marriage but before the date of separation by either or both spouses, excluding inherited or gifted assets, net of liabilities over the same period. 

The next step is for the value of the net matrimonial property to be "shared fairly" between the spouses. The starting point for this is 50:50, but this can change if there are "special circumstances" that would justify unequal sharing.

Although this means, on the face of it, that the assets you take into the marriage will not need to be shared if you separate, real life is never quite as simple as that. Many people will use premarital assets to fund the purchase of other assets after the marriage, such as putting down a property deposit using premarital savings. If this happens, the asset you acquire as a result is matrimonial property. In other words, you will have "converted" a non-matrimonial asset into a matrimonial asset.

Looking specifically at shareholdings, many people acquire substantial shareholdings before they get married, either through being part of a family company or establishing their own business. Shares may also be acquired at any time during the marriage by way of gift or inheritance, particularly in a family company. If nothing happens to change the nature of that shareholding during the marriage, your spouse should not be able to claim a share of its value if you divorce, on the logic that the shares are not matrimonial property (because they were acquired before marriage, or by way of gift/inheritance). However, if you make changes to that shareholding, there is a significant risk that doing so will "convert" these shares into matrimonial property.

It is possible to have a prenuptial agreement which states that your spouse will not have a claim on the value of an asset that has been "converted" into matrimonial property in this way. Even without a prenuptial agreement, it is still possible, and very common, to argue in the divorce that your spouse should not get the full benefit of your investment from premarital funds, and that you should get credit for it by way of unequal sharing of the "pot" in your favour. However, there is no guarantee that a court will agree.

Adding to this complexity is the difficulty of working out whether there has actually been a conversion into matrimonial property at all, depending on the nature of the corporate restructure. As a broad indication, if your shareholding has changed in substance (e.g. you have acquired new shares in place of, or as well as, your premarital shares), as may happen where there has been a takeover or some other fundamental change to the substance of the company, then it is likely the new shares/shares in the new entity will be matrimonial property. However, if the company has been restructured in a way that changes the non-property rights and liabilities arising from the shareholding, but not the underlying nature of the shares as property, this is less likely to be treated as a conversion for family law purposes. More nominal changes such as a reregistration or a change of name, again, do not normally alter the nature of the shares, and hence would be unlikely to convert them into matrimonial property. This is an area of family law which is still being tested by the courts, due to the perceived unfairness which may result (depending on whether you are the beneficiary or the loser in this scenario) and judges have grappled with some highly technical arguments about the nature of shareholdings in corporate restructures. Accordingly, businesses should always exercise great caution when it comes to restructuring a premarital business interest that would otherwise be excluded.

We recognise that nobody wants to contemplate their marriage ending, but business change is unfortunately not the only change we may have to contend with throughout our lives - relationships can change as well. Even if all is well and you don't anticipate separating, it is still worth discussing the options to protect your interests as part of a reorganisation. For example, you might propose a postnuptial agreement with your spouse (similar to a prenup) covering how the new shares would be treated if you were to separate.

In any event, if you are contemplating a restructure of your shareholdings, it is always worth asking your corporate solicitor to refer you to one of our family law experts for a discreet and strictly confidential discussion of your options. And that's advice that will never change.

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