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Divorce and the Company Director
Divorce is almost never easy and the financial negotiations can be protracted and difficult, particularly when there are business interests involved. In this article we consider some of the issues surrounding divorce for company directors. In the first section, we deal with directors who are, effectively, senior employees of the companies of which they are directors. We refer to them as ‘employee directors’. In the second section, we consider the additional issues that can affect directors of companies in which they have a controlling or substantial shareholding, whom we refer to as ‘equity directors’.
What follows deals with only some of the potential areas for dispute, all of which must be thought through.
Firstly, there are some general principles the courts will apply no matter what the circumstances. These are:
- The behaviour of the parties (unless highly reprehensible) is not normally relevant to the settlement. Divorce is not about blame, it is about negotiating a deal which achieves the necessary objectives;
- The first priority of the court will be the welfare of any minor children; and
- Unless you have a pre-nuptial or post-nuptial agreement (and the former are only persuasive, not binding), the court will normally start from the premise that ‘matrimonial assets’ (those built up during the marriage) should be divided equally, although cases settled since 2017 suggest that in some circumstances the court is justified in moving away from the principle.
The position of an employee director on divorce is essentially the same as that of any other employee. However, directors often have more complicated remuneration schemes – involving benefits in kind, performance-related bonuses and significant pension schemes. Working out the appropriate amount of remuneration that should be regarded as continuing income for the purpose of calculating maintenance payments can be a problematic area.
One common area of dispute is when one of the divorcing couple has given up a promising career (the most common circumstance is when a wife gives up work to care for children) to support the other spouse in furtherance of their career. Some of the largest divorce settlements in the history of the UK courts have been made in such cases.
One other particularly difficult area is that of future income in the form of bonuses or pensions. Normally, the courts will not look too far ahead (a policy which continues) when determining the value of likely but unearned income, but in a recent case, in which a husband failed to reveal that he was expecting a substantial increase in income, the court did revise his ex-wife’s maintenance payments. Allowing an ex-wife a proportion of her ex-husband’s pension income when he retires is also commonplace.
There may be trusts or Inheritance Tax plans which have to be rethought. Issues involving foreign domicile or foreign property may also give rise to additional complexities.
The position regarding equity directors is more complex, because there are normally several additional areas of potential dispute. For equity directors, there are questions of business value and, in the common circumstance in which both spouses are shareholders or managers of and/or are remunerated by the company, further practical difficulties arise.
In these circumstances, there can be numerous points of contention, such as:
- What is the value of the company?
- Does the value of the company depend on a particular individual?
- What is the value of a particular shareholding (particularly if it is a minority shareholding)? The provisions of the company’s articles are also often in point here;
- How are the business assets (e.g. property) owned and by whom?
- Can the divorcing couple continue to be involved together in the business?
- What are the tax issues raised by the proposed arrangements (e.g. transfers of assets out of the company, sales of shares)?
- Can the necessary non-compete clauses and employment law issues be dealt with?
- Will the proposals cause problems over guarantees with the bank?