I set up a business, which my soon to be ex-wife later joined as a shareholder. Could the courts force me to hand over shares to her as part of the divorce?
Emily Brand, partner at Boodle Hatfield, says there is a huge number of family-run businesses in the UK, so you are not alone in finding yourself in this position. Depending on your ex-wife’s role in the business, the extent to which (if at all) it was established before you began your relationship and subject to the nature and extent of your other assets, it is unlikely that your wife will remain a shareholder.
The legislation requires that, where financially possible, there should be a “clean break” between a divorcing couple. The court will, therefore, try to ensure that all ties between you are severed as soon as possible, and they could decide that remaining as shareholders in the same company could extend that connection unnecessarily.
Given that you set up the business, and working on the assumption that your ex-wife only plays a minimal role, the likelihood is that the court will seek to ascertain whether it is possible for you to “buy out” your ex-wife’s interest instead. This could depend on the liquidity of your company (or whether there are other assets which could be offset against the value of her interest). If there is sufficient liquidity, it may be that the court will require you to pay your ex-wife cash instalments over time.
Be aware, however, there was a case recently that provided for the non-business owner to retain or receive a minor shareholding and appointed a shadow director to sit on the board to ensure that her interest (and potential dividends) in the business was protected. The wife retained shares because there was insufficient cash in the company to pay her entitlement in full.
Similarly, depending on the value of the company, the manner in which the shares are held and the nature and length of the marriage, there is also a risk that a court could order a sale of the company to ensure that your ex-wife receives the full value of her entitlement in a situation where there is limited liquidity. This is the worst-case scenario, but it is best to get legal advice as soon as you can to prepare for all outcomes that could arise from the divorce.
How can we best run a family foundation after our marriage ends?
My husband and I are in the process of divorcing. One of the more complex issues we have to consider is our family foundation which he and I set up over a decade ago to support local charitable causes. We want to protect the foundation as much as possible during the separation process and ensure it can continue to deliver on its objectives in the long term once we are officially separated. I intend to continue my work with the foundation following our divorce, while my husband has suggested it would be best if he were to step back. Does this sound like a sensible approach and what advice do you have for us?
Pippa Garland, partner in the charity and philanthropy team at Russell-Cooke, says it is great that you agree on wanting to protect the family foundation. The good news is that by setting up the family foundation as a separate charity, you will have given yourselves the best chance of doing so.
This is because any assets that you have donated to the family foundation will be protected by the charity’s “shell”, and can only be used for the charity’s purposes. All funds currently within the family foundation can therefore be used to support local charitable causes: they will not form part of your joint estate to be divided and shared on divorce. This is all helped by the fact that you and your husband are approaching things sensibly and neither of you seems to want to try to challenge or undermine the foundation.
However, you are right to be thinking about how the charity can deliver its long-term objectives after you separate. I assume you are both currently trustees of the family foundation and equally involved in its operations. Your husband’s suggested approach, to step back, may be a sensible one, or at the very least there needs to be clarity and documented arrangements as to your respective roles.
My experience is that, even with the best of intentions, governance of a family foundation following a separation can be difficult. Although the assets are protected, the foundation’s operations could become hamstrung if there are conflicts on the board. This can also cause significant issues for other “neutral” (or even “non-neutral”) trustees on the board. The fallout from the Cooper-Hohn divorce, where disagreements relating to the charity the couple jointly founded ended up in the Supreme Court, demonstrates just how complex these governance issues can become.
Both the legalities and realities need to be considered, now and for the longer term. The Bill & Melinda Gates Foundation announced a two-year “trial period”, to see if Bill Gates and Melinda French Gates could continue to work together as co-chairs and trustees of the charity. If you both wished to continue with the family foundation, you could consider a similar trial period. However, it must be clear and agreed at the outset what would happen if the trial is not successful.
If your husband does step back, it is possible he may wish to pursue his own charitable endeavours following the separation, and use half or a share of the family foundation’s assets to do so. While the foundation’s assets are unavailable for distribution or sharing between you as part of your divorce, the foundation may be able to make a grant of some of its assets to a new charity set up by your husband. However, this would only be possible if it was in the family foundation’s (and not yours, or your husband’s) best interests to do so. Any assets transferred could only be used in furtherance of the family foundation’s charitable purposes.
Ultimately, working together amicably now to agree a plan for the family foundation is most likely to protect its future work. And it is right to recognise that working together in the future may become more difficult. Therefore your husband stepping back is a sensible option to consider.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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