Under most divorces, the major asset is the family home. In that case, if the sides don’t reach a divorce arrangement and go to litigation the courts usually order either that the home be sold and the proceeds split (after paying off mortgages etc.) or one partner is allowed to buy out the share of the other spouse. yet, if the husband and wife own a joint business, the traditional rules of asset division aren’t always enough. Sometimes the courts will sometimes use an additional tool with the goal of protecting either the company and/or the differing interests of each spouse.
The concept is that a closely owned business can’t be efficiently managed when there is great personal conflict amongst its owners/managers, and when each of them is trying to pull the business in a different direction, as is assumed will happen during litigated divorces.
The court usually deals with this situation in one of three ways:
- Forcing the sale of the company to the highest bidder and dividing the proceeds between the parties (just like with real estate).
- Allowing one spouse to buy out the interest of the other spouse in the company (just like with real estate).
- In rare cases, the court may order for the shares of the company to be divided between the spouses.
Dividing the shares between the spouses is utilized when the court thinks that there will be less damage to the value of the underlying business by dividing shares than by selling or forcing one side to buy out the other side. Some of the situations in which this will materialize are when one side isn’t actively involved in the management of the business and has a good relationship with company management, or when the two spouses together hold a minority interest in the company (which is usually held by other family members) and the other family members don’t have a problem working with either of the spouses.
In the event that the company is either sold to a third party or one of the spouses buys the other out, then there is the issue of the date of valuation of the shares to be sold. Especially if one of the spouses doesn’t work full time at the business or doesn’t work there at all, or if one of the spouses left the business, then the courts will in general use the date of separation of the couple as the date of valuation of the company. There are two reasons for this – a) because the remaining spouse might try to lower the value of the business after the other spouse leaves in the hopes of paying less to buy out the spouse, and b) because if the value of the business increases after one of the spouses has left then the supposition is that it is due to the efforts of the remaining spouse and it would be unfair to punish him/her for continued hard work. In any case, before taking any actions it is important to speak to a veteran(a) lawyer with experience in such matters.