UK family law courts are generally loathe to force the sale of a business to satisfy the debts of a shareholder resulting from a divorce settlement. Most couples who share interests in a company aren’t aware of this preference, and, even with the UK’s new no-fault standards, it’s common to find divorcing clients that are anxious about whether they’ll lose the source of the cash flow that’s supported them for years.

As Melissa Deutrom and Aaron O’Malley of Herrington Carmichael LLP write in an article last week:

A company is what is known as a “separate legal entity” … and there is said to be a “corporate veil” or barrier between the company itself and the company’s owners (its shareholders). Generally speaking, this means that the court would be unlikely to order a company to transfer or sell assets as part of financial proceedings stemming from divorce. This is because such assets are owned by the company and not by the spouse, and the company is not usually a party to such divorce proceedings.

As business valuers know, courts are less reserved about ordering the transfer of assets owned by one of the parties to the other party in a divorce, including the transfer or sale of the shares of a private company. Duetrom and O’Malley stress that the valuation issues become even more complex if an uninvolved spouse is a shareholder already or has other roles within the enterprise.

The new article offers a clearheaded examination of the common solution the UK courts use called “Wells sharing” (after the case Wells v Wells [2002] EWCA Civ 476). The courts order transfer of shares from one partner to the other without liquidating them.

In the original Wells case, the judge was unable to value a shared-interest firm that had declined into operating losses after the couple separated. The appeals court found that the income from the business was uncertain. The solution was to leave both parties with retained shares. “Retaining an interest in a company alongside your former spouse may be far from desirable for some parties—however, this would mean at least, that both parties would be subject to either increase or loss as a result of economic downturn,” the authors say.

Other valuation options: This new analysis describes some of the variables available to family law courts in such situations, including:

• Fixing a value for the shares in a company as an offset against other assets. Of course, valuing shares in a company is not always as simple as we would hope, particularly during times of economic uncertainty.
• With the support of business valuation experts, reducing the value attributed to the company and awarding more shares when the risk or uncertainty is high.
• Considering minority discounts when the spouse does not have control of the company.
• Considering whether the assets are truly “operating” or just held in trust by the company. The authors cite Akhmedova v Akhmedov [2018] EWFC 23.
• Including provisions within the company’s constitutional documents (i.e., the Articles of Association), or within a shareholders agreement, which provide for what is to happen to the shares in a divorce situation.