Business Law & Compliance

Keep this in mind when you divorce your business partner

6 min read

09 January 2018

To divorce your business partner is a difficult process, and one that is often not anticipated or planned for. It can be complex when children are involved – but your company can make things get down right dirty.

As a commercial lawyer I know that pre/post nuptial agreements are rare and, in all honesty, discussions about shareholder agreements with clearly allocated shares aren’t particularly romantic.

I often hear the immortal words, “We are married and in love so we don’t need commercial documents”. This is a very natural way to feel, and along with the many things to consider when planning a wedding, making commercial decisions usually aren’t too high up on the list.

However, divorces do happen and more often than not they can have a negative impact on business. If you are about to divorce your business partner, here are some things you need to know.

The equal split

The starting point in family proceedings, if you have no legal documentation, is that joint assets go into a pool and until you prove otherwise, there will be a 50/50 division. If a business decision is required and you have an equal ownership of the company (by law or default), but cannot agree, it is a deadlock. This could end up with the company being wound up.

We have acted for many clients in this situation. In many cases, one partner has no real role, but uses the joint ownership/entitlement as a means to negotiate for more in the divorce.

One client lost everything because he hadn’t documented his loans to the company. His wife asked for money to keep the company going and provided the cash. When they split, because he didn’t label his money and everything went into a pool, he lost his extra investment.

Intellectual property

When you divorce your business partner, you need to know who owns the Intellectual Property (IP). Did you transfer this to the business or is this owned by one or both of you personally?

IP can be the company’s main and most valuable asset, and could be held to ransom. Without an agreement in place a costly dispute could arise. It’s worse with jointly owned IP as someone will have to buy out the other to use it. Then you must try and agree who will keep the business, the price and you must have the means to pay for it.

Cash

Often partners don’t formally note down loans made to the business and just put in cash as required. Since it’s a family business, this means it is difficult to recoup these when you divorce your business partner.

What if one spouse has not taken a salary or dividend but the other has? Without an agreement permitting this the other party could lawfully be entitled to similar payments immediately, causing cashflow/tax issues.

You might want to sell the business, as there is no cash to fund a dissolution or buy out the other, but you will need the others party’s consent. You need to agree a price as well as how you repay each other and in what shares. A dispute would be off-putting to buyers and therefore you would need to decide this first.

If assets cannot be sold; an agreement reached or one of you cannot afford to buy the other out, the court will be forced to choose a side or wind up the company, losing you everything you put in.

Protection

If you do decide to divorce your business partner then you will need a founders agreement. This should at the very least, cover these important points:

• Transfer of all IP to the company;
• Set out what happens in the event of a dissolution or dispute;
• Agree restrictive covenants to refrain the departing spouse stealing clients, setting up in direct competition or sharing confidential information;
• Specify who owns what shares and make clear any monies put in by each of you. Keep good accounting records to formally log all sums paid in and withdrawn so its transparent and no one can hide anything during the proceedings; and
• Make sure your Will mirrors this too. In the case of your death it governs where your shares go and how this will be dealt with.

Any business should start off right and get its house in order with clear legal documents. This protects the business and the founders in the case of an unexpected dispute or divorce and males it easier to fairly distribute the business interests.

Karen Holden is the founder of A City Law Firm