Settling a divorce is an emotionally draining process for all parties involved. Legal processes such as the separation of assets and custody make the process especially challenging. When it comes to couples who are also business partners, there is the added complication of deciding what must be done with their company. This can be a complicated situation, considering each spouse’s shareholding may not always be equal, making it difficult to determine how to divide the company equitably. Depending on the parties’ relationship, they may even be unwilling to work together in the same office or give up their control completely.
In light of these concerns, this article explains various exit strategies that may be employed post-divorce, including buyouts, dissolutions, and continuation agreements. It also provides guidance on navigating negotiations and facilitating the transfer of ownership in a fair and amicable manner.
Buyouts
Through a buyout, one spouse buys the other’s share of the business. This may be useful in situations where one spouse is interested in retiring from the firm, but the other spouse wishes to keep it running. For a successful buyout, it is necessary to valuate the firm and the shares owned by the retiring spouse. Independent valuation may be done by following one of three approaches: income-based, market-based, and asset-based.
In preparing a buyout agreement, parties should carefully consider payment timelines, payment methods, and crucially, whether the buying-out spouse has the financial capability to purchase the shares. Additionally, it may be beneficial to consider setting-off some of the expenditure relating to a buyout with other properties being divided under the divorce.
Parties should also consider the terms of such buyout, including whether the bought-out spouse will still have a role in the company, and what that might look like. Further, to give the bought-out spouse a transition period, and to ease the financial stress on the spouse having to purchase their shares, the parties can consider phasing the buyout over a period of time.
The retiring spouse must also consider what their role will be post-buyout. They should consider if they will start another business of their own, join another business, consult, or retire from the industry altogether. In this regard, the company’s incorporation documents should also be reviewed to determine if the retiring spouse has any non-compete or non-disclosure obligations post-buyout. This may need to be negotiated further in case a non-compete clause is present, but the retiring spouse wishes to continue to work in the industry. The incorporation documents can also reveal if any proprietary property needs to be transferred alongside a sale of shares in the buyout.
If neither spouse wishes to continue owning or managing the business, the parties can also consider selling the entire business to a third party. This may be required if the parties have irreconcilable differences, or if the business is no longer a going concern and neither of the spouses are dependent on it for their income. Here, the value of the firm would need to be assessed, each spouse’s share in the company will have to be determined, and then the sale proceeds would be divided according to the decided shares.
Whether one spouse is buying out the other or the business is being sold to a third party, it is crucial to keep in mind the employees of the company and other members – including, if present, other co-owners and directors. The spouses must consider how their actions will impact others in the company and can possibly consult them about how best to go about the matter. At the same time, the parties should also maintain their confidentiality with respect to the divorce settlement and other related proceedings.
Dissolution
If both parties are certain that they cannot continue managing the company and do not wish to sell it to a third party, they may consider dissolving the company. This involves going through formal procedures to legally close and deregister the company. To do this under Singapore law, the company must deal with its all its liabilities (especially taxes and debts) and liquidate all its assets.
In Singapore, if a company is insolvent, it must be dissolved through winding up. If it is debt-free and solvent, the parties can choose to wind-up or strike off the company. Of the two options, striking off is preferred as it is much quicker to do so than winding up, and is also cheaper since there are no liquidation costs involved. Pursuant to Section 344 of the Companies Act, a company director can apply to the Accounting and Corporate Regulatory Authority (ACRA) to strike off a company from the Register. ACRA may strike off the company if it is satisfied that it is no longer carrying on business, or if other factors are met.
As with a buyout, it’s essential to consider other stakeholders when deciding to dissolve the company. This involves not only the employees, co-owners, and directors within the company but also external parties like creditors, contractors, and customers. In some cases, it might be preferable to sell the company to a third party or to the remaining co-owners, or simply step down from active management if both spouses are unwilling to continue working in the business, especially if the company is still viable and its members wish to keep it operational.
Continuation and Co-ownership Agreements
In some situations, spouses may choose to continue owning and working in the business even after their divorce. While they could simply maintain the status quo, it’s often wise to reassess their division of responsibilities and shareholding. Clearly defining each spouse’s liabilities and responsibilities can help establish boundaries, especially if they prefer not to work closely together post-divorce. Revising the shareholding arrangement might also be beneficial to ensure it reflects their new roles within the company more equitably.
Any changes or agreements should be thoroughly documented and formalised in a signed agreement. If necessary, the company’s incorporation documents should be reviewed and amended to reflect these updates. Additionally, safeguards can be added to limit either spouse’s ability to make unilateral decisions that could significantly alter the company’s structure or governance.
Agreements for Dividing Assets
When dividing assets after a divorce, it’s essential to have a clear agreement, especially in scenarios involving buyouts or sales to third parties. This agreement should determine each party’s share and specify the exact allocation of assets, whether they involve immovable property or liquid assets.
The agreement must state that the settlement is final and enforceable, ensuring that it is equitable and clearly outlines which assets are allocated to each spouse, with details provided through annexures or other documentation. Additionally, it should include a dispute resolution process that is both suitable and accessible for both parties, in case any issues arise during the division.
In some cases, one spouse may be the legal owner or partner in the business, while the other has contributed indirectly to its growth through support. In these situations, the spouse who contributed indirectly may be entitled to a lump sum payment to reflect their contribution.
Tips to Navigate Negotiations
When navigating post-divorce options, parties will need to negotiate several critical aspects, such as their future role in the company and their share of any sale proceeds or assets. Securing legal representation and expert advice is essential to guide you through these negotiations effectively.
During negotiations, open communication and honesty are key to clearly expressing your interests. Equally important is listening to the other spouse to find a mutually agreeable middle ground. Given the emotional intensity of divorce, negotiations can become challenging. In such cases, involving a third-party mediator can help maintain a constructive environment, ensuring that emotions do not derail the process.
Confidentiality is also crucial for productive negotiations. To create a secure environment where both parties feel comfortable disclosing necessary information, consider signing a confidentiality agreement before negotiations begin. This agreement can also define which properties and assets are under consideration, helping to set clear boundaries during discussions.
Lastly, it’s important that negotiations are efficient and lead to a decisive outcome. The process should not be prolonged or used as a tactic to delay the divorce settlement or asset division. Aim for a timely resolution that facilitates a smooth transition for both parties.
Conclusion
A divorce raises questions not just for the couple’s separation of personal assets, but of their company as well. This necessarily involves considering other stakeholders, making the process more complex and possibly emotional for the parties involved. Considering these complications, this article has explained different exit strategies parties may opt for post-divorce. It also provided tips on how to navigate negotiating these strategies, emphasising the importance of setting boundaries whilst maintaining open communication.
Please note that this article does not constitute express or implied legal advice, whether in whole or in part. For more information, email us at info@silvesterlegal.com
