Dealing with shares in a divorce

On the breakdown of a marriage, family lawyers will guide the individuals involved through the convoluted process of the division of assets and whatever terms are agreed will be set out in a financial, or other court, order. However, there can be added complications if one or more of the parties holds shares in a company.

Shareholdings can be valuable assets, but when they are held in private limited companies, they are also frequently illiquid – there is usually no desire, or market, for them to be sold, so how can they, or their value, be divided between the separating spouses?

A financial order will, therefore, usually include terms providing for what happens to

• any income resulting from the shares for a period of time while they are still held by one of the parties; and
• the proceeds of any sale at any point in the future.

Income proceeds

A certain percentage interest in the income arising from the shares can be allocated to the non-shareholding spouse, requiring the shareholding spouse to pay over a proportion (after tax) of any dividends received. What if dividends are declared, but not actually paid (for example, because they are used to repay a loan) or are to be distributed otherwise than in cash? In those situations, the non-shareholding spouse would usually still require an amount of cash equal to their entitlement, to prevent a situation where the shareholding-spouse may be able to manipulate a situation to avoid having to make a payment.

The terms of the court order would usually also provide for payment deadlines and notification requirements in favour of the non-shareholding spouse.

Capital proceeds

As with dividends, a certain percentage interest in the capital proceeds of a sale of the shares may be ordered to be paid to the non-shareholding spouse, by the shareholding spouse. The terms of the order can be complicated in this respect, as they may need to make provision for the possibility of deferred payments, earn-out payments, or non-cash payments (such as consideration shares). A third party buyer is very unlikely to agree to issue shares to the former spouse of one of its new shareholders / employees, so other options need to be considered:

• The shareholding spouse is required to find the funds to make a cash payment to the non-shareholding spouse at the time of the sale, potentially from other elements of the sale proceeds;

• The shareholding spouse is required to hold a proportion of their new consideration shares on trust for the non-shareholding spouse. However, as many articles of association for private companies impose restrictions on the transfer of beneficial interests in shares as well as legal interests, this is a risky position to take, especially if the identity of any potential buyer (and therefore the terms of their articles of association or shareholders’ agreement) is not yet known; or

• for the terms of the order to continue to apply in respect of a proportion of any consideration shares (or other non-cash assets) received by the shareholding spouse. Unless there are time limits agreed, these terms can therefore apply for a significant period of time.

Which option is chosen is likely to be largely influenced by the value of the shares in question.

As with dealing with the proceeds of dividends, the terms of the court order would usually also provide for payment deadlines and notification requirements in favour of the non-shareholding spouse.

Reorganisation

In both cases set out above, it is also important to consider whether the terms of the order should apply to any other shares that the shareholding spouse may acquire as a consequence of their existing shareholding, for example, as a result of a bonus issue of new shares. Further, if there is a restructuring of the shareholding group, which results in the shareholding spouse owning shares in a different company, those new shares should also be caught by the drafting of the terms of the order, so that the non-shareholding spouse can still be benefit from the same original value / shares.

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