Protecting business interests during divorce

Business interests need to be considered long before the marriage ends

Divorce is a process of financial uncoupling as much as emotional separation. The division of assets may be contested and it may take a while to reach agreement, particularly where a couple has a high net worth. What happens when there are significant business interests involved? This could be a result of the couple jointly owning a business or one spouse starting a business, possibly engaging the other as a shareholder in the business. Whatever the circumstance, the protection of business interests adds an additional layer of complexity to the divorce proceedings. But beware: you need to think about the potential impact of divorce on any business interests you may have long before you reach the divorce court.

South Africa recognises various marital regimes, each with its own legal implications for the division of assets. We explore the key considerations for spouses seeking to safeguard their business interests during a divorce, under the different matrimonial regimes in South Africa.

Matrimonial regimes in South Africa

South Africa recognises three marital regimes. Marriage in community of property is traditional and still the most common type of marriage. In this matrimonial property regime, all assets acquired before and during the marriage are part of a joint estate which is shared equally between the spouses. The parties’ business interests are included as part of the joint estate. Each spouse’s shareholding in the business is the relevant factor in the calculation of the joint estate. The assets and liabilities of the specific business (company, partnership, etc.) belong to the juristic entity and do not fall within the joint estate. 

A marriage out of community of property with accrual allows spouses to maintain separate estates during the marriage. However, the spouse with the lesser growth in their individual estate is entitled to receive a share of the greater accrual when the marriage is dissolved. A marriage out of community of property without accrual provides for the complete separation of assets before and during the marriage, with each spouse retaining ownership of their respective assets.

Antenuptial and postnuptial contracts 

To protect business interests, spouses should consider entering into an antenuptial contract (ANC) before marriage or registering a postnuptial contract (PNC) after the marriage. They may consider a PNC if their financial situation changes significantly as the marriage progresses. A couple who marries at a young age, with little in the way of assets, may marry in community of property. As they launch businesses or take on other financial interests later in life they may choose to amend their marital regime. 

ANCs and PNCs are legally binding agreements that define the division of assets in the event of divorce and allow spouses to protect business interests and minimising potential disputes during divorce proceedings by specifying how commercial holdings are treated. For example, a business can be totally excluded in the ANC or the value of the shareholding can be noted as part of the spouse’s commencement value. 

Accurate business valuation

A business implicated in a divorce agreement must be accurately valued. A qualified professional, such as a forensic accountant, business appraiser or actuary, can help ensure a fair assessment of the business’s worth. This valuation will play a pivotal role in determining the division of assets during divorce proceedings. 

Business contracts 

ANCs and PNCs are not the only contractual means to protect business interests. The partnership or shareholder agreements or the company’s Memorandum of Incorporation (MOI) can include provisions that protect the interests of the other owners in the event of the divorce of one owner. The terms of these contracts must be carefully constructed to be watertight. 

Don’t wait until divorce looms

An ANC or PNC provides the framework for the division of assets on divorce, and those assets include business interests. However, by the time a couple has embarked upon divorce proceedings, it is too late to draw up an antenuptial or even a postnuptial contract. Similarly, if the shareholder agreement or MOI is in place, it is too late to alter it. Some of the most acrimonious divorces involve couples with shared business interests. They may nominally own a business together, often for tax purposes, with one spouse having an equal shareholding but no real involvement in the business.  The other spouse has built the business singlehandedly using their skills and expertise. Whether each spouse has an equal shareholding or not is largely irrelevant in a marriage in community of property, as any shareholding in the business is part of the joint estate. On divorce the entrepreneur effectively gives away half the business in the divorce agreement, which often leads to concealment of assets and other tactics designed to reduce the “loss”.

Other actions you can take

If you are a business owner considering divorce, and you don’t have an ANC or PNC in force, there are still actions you can take to look after your interests. If your business records are in order, you should have thorough documentation regarding your ownership stake and involvement in the business. This can include shareholder agreements, employment contracts, capital investment records, and any other evidence of your active contribution to the business’s success. Clear documentation can support your claim to your perceived fair share of the business.

You could also consider buyout or settlement options. Depending on how amicable the divorce proceedings are, you may be able to negotiate a settlement or buyout agreement with your spouse that allows you to retain full ownership of the business. This may mean transferring other assets or making financial arrangements to compensate your spouse for their share of the business within the marital estate.

Lastly, if negotiations are rancorous, it’s worth investigating alternative dispute resolution methods, such as mediation, which can provide a more collaborative environment for resolving issues. A mediator may present options you and your spouse have not considered, which may limit the impact of the divorce on your business and facilitate a mutually acceptable resolution.

Seek the guidance of an expert divorce attorney

An experienced family law attorney like Simon Dippenaar & Associates Inc can provide guidance tailored to your specific situation, help you navigate the legal process, and protect your business interests. We provide expert legal advice and support you every step of the way. If you are entering into marriage we can advise you on matrimonial regimes and help you draft an antenuptial contract, if appropriate. If you want to have a preliminary discussion in confidence, contact Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za.

Further reading:

• The financial implications of divorce
• Forensic accountants and divorce
• Rule 41 – Mediation and divorce
• Increasing number of divorces involve crypto

Divorce Attorney Cape Town

http://divorceattorneycapetown.co.za/

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