Divorce can place huge pressure on a family business. The usual assumption is often that one spouse should exit with a larger share of the non-business assets, while the other retains the business. In some cases, that may require significant capital extraction from the business to fund the settlement.
But that is not always the right answer. In some cases, there may be a strong commercial reason to remain in business together, for example where goodwill, client relationships or succession planning depend on it, where both parties’ financial needs must be balanced, or where the value of the business may be realised in the short term or not at all. In other instances, using company cash to fund an exit may not be possible where there are insufficient profits or reserves.
Fairer outcomes can be achieved by thinking innovatively.
With careful legal, tax and financial planning, it may be possible for both former spouses to remain shareholders and/or directors, draw value from the business fairly, and reduce the risk of future disputes. This blog highlights the main issues to consider.
Start with the objective
Before looking at a restructure, the parties need to be clear about what they are trying to achieve by staying in business together. Usually, the aims are:
Business continuity - allowing the company to trade without unnecessary disruption or excessive capital extraction.
Succession planning - enabling both parents to support the children’s transition in to business ownership, perhaps alongside wider family estate planning for mutual benefit.
Fair financial provision - balancing non-business liquid assets, income needs and the risk attached to business ownership. Replacing spousal maintenance payments from taxed income with dividends may also have an upside for the family.
Reduced future conflict - replacing informal family arrangements with clear commercial governance.
Role of the family lawyer
It is important that business owners have access to both personal and business legal advice on divorce, which is where instructing a full-service firm can add real value. The role of the family lawyer is likely to include:
Working closely with corporate and private client lawyers to create tailored outcomes for the business and the family, ensuring personal and commercial planning dovetail. Tax advice is likely to be required.
Supporting business owners with voluntary and court-ordered disclosure to assist negotiations.
Preparing the financial remedy order for court approval once a settlement has been reached.
Project managing the implementation of the agreement, which could include obtaining the right consents and supporting the business’s transition to a new structure, potentially involving a wider team of lawyers, the company accountant and financial advisers.
The documentation business owners will need
A financial remedy court order
A financial remedy order records the financial agreement reached and makes it legally binding upon divorce. In this context, it should dovetail with the wider business documentation, explain what the arrangement is intended to achieve, and clearly set out how the parties’ financial claims on divorce are being resolved. It may deal with property transfers, lump sum payments, spousal maintenance, pension sharing and any ‘clean break’, alongside the transfer or retention of shares.
A shareholders’ agreement
Many family-run businesses do not have a shareholders’ agreement. Without one, shareholders may have little clarity over their rights and obligations, or how disputes should be approached. If former spouses are to remain in business together, a shareholders’ agreement becomes indispensable and should deal with the areas most likely to cause difficulty:
Dividend policy - where dividends are intended to provide income to the shareholders, the agreement should set out how profits will be distributed, other permissible capital extraction, when profits may properly be retained in the business – for example for reinvestment and capital expenditure - and what independent review mechanism will apply if there is disagreement. This helps reduce the risk of one party feeling that dividends are being suppressed or manipulated.
Governance and decision-making - clear governance is essential. The agreement should address board control, which matters should be reserved for shareholders’ consent (without a shareholders’ agreement the default provisions are minimal) and information rights. It should also distinguish clearly between the role of a director, who is responsible for managing the business, and the role of a shareholder, who owns an interest in it. Being clear about those roles at the outset will help ensure the structure meets the parties’ objectives and supports effective decision-making.
Changes to share capital – the agreement should anticipate how ownership may change over time. It should set out when and how shares may be transferred, who may acquire them, whether transfers should be compulsory in certain circumstances, and the rules governing the issue of new shares. Clear provisions will give both parties certainty and help preserve intergenerational interests.
Exit provisions - even if joint ownership works now, there should be a clear route out. Buy-out mechanisms, valuation provisions and sale rights should be agreed in advance. Drag-along and tag-along provisions can be important too, particularly if a sale is envisaged: drag rights may allow a majority shareholder to require minority shareholders to sell on the same terms, while tag rights may allow a minority shareholder to participate in a sale negotiated by the majority.
Business protection – where both parties remain joint owners under a new arrangement, whether temporarily or for the longer term, the documentation should include appropriate safeguards to preserve the value of the business. These may include confidentiality obligations, restrictions on competition and the solicitation of staff, and non-disparagement provisions.
Dispute resolution - a good agreement should also explain how disputes will be resolved — for example through internal escalation, mediation or expert determination.
Articles of Association
The company’s articles should be reviewed alongside the shareholders’ agreement. The two documents need to work together. This may involve changes to share rights, dividend flexibility, transfer restrictions and director appointment provisions. Any inconsistencies can create uncertainty and future litigation risk.
Employment contracts
Where one spouse remains active in running the business, their role, responsibilities, pay, benefits and termination arrangements should be properly recorded in an employment contract.
The working spouse should receive a commercial salary for their role, to ensure their additional contribution to the success of the business is rewarded. This will also help avoid arguments that value is being extracted through salary rather than shared through dividends.
Will the family court approve the restructure?
The court will need to be satisfied that the proposed outcome is fair, the parties’ needs will be met, and that the arrangement is workable. The court will be more comfortable approving a court order negotiated on a consensual basis where it is clear that the parties have had appropriate legal and expert advice, and the necessary documentation has been prepared.
Final thoughts
Retaining joint ownership of a family business
after divorce will not be right for every case. But where there is a sound commercial reason for doing so, or where it forms part of wider family financial and estate planning, it can preserve value, support fairer financial outcomes and help both parties remain engaged in supporting the next generation into the business.
Multi-discipline legal input, clear governance, proper documentation, and accountancy and tax advice are crucial to planning what comes next.
Where one party really should exit the business, an immediate sale of their shares at full value is not the only option—particularly where the business lacks sufficient cash or profits to fund a buyout. Parties and their family lawyers should still work closely with corporate specialists to develop practical, straightforward solutions tailored to the circumstances.
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