Divorce affects families as well as businesses. How can you limit the risks?
Article written by Natasha Truyens (Barnard Inc.)
When people get married, they always hope for ‘happily ever after,’ but the sad fact is that some marriages will end in divorce. Divorces are always difficult for everyone involved and they can become that much more arduous when either spouse owns or is part of a business.
Your business is very likely the most valuable financial asset you own, but you could be unwittingly doing things that could put your venture at risk in the event of a future divorce. Depending on your individual circumstances, your spouse may be entitled to as much as half of your business in a divorce. Since it’s probably safe to assume that you will not want your ex-spouse to remain in your life as a business partner, what can you do to protect your business?
How to protect your business before getting married: in community and out of community
In South Africa, the default form of a marriage is ‘In Community of Property’. This means that you share half of each other’s assets, debts and liabilities – this includes any business interests. To avoid this potential issue as a business owner, you can get married ‘Out of Community of Property’ by having a Notary Attorney draft an antenuptial contract (ANC) before you say “I do” to each other.
The antenuptial contract option provides for two systems; with accrual or without accrual. Getting married out of community of property without accrual simply means that each person retains his or her separate property and has complete freedom to deal with that property as they choose during the course of the marriage relationship. Alternatively, by getting married out of community of property with accrual, the spouses-to-be will exclude the asset value that he or she brought into the marriage (and any other assets which may be included in the ANC). However, the spouse whose estate grew the least upon dissolution of the marriage, will have a claim of half of the difference between the values of the two estates.
A claim against a spouse’s estate, or against the joint estate in the case of a marriage in community of property, arises and is calculated on date of dissolution of the marriage relationship – either on date of divorce or death of one of the spouses.
How to protect your business after getting married: postnuptial agreements
If for some reason, you didn’t execute an antenuptial contract before tying the knot – and you are therefore married ‘in community of property’ – it is still possible to change your matrimonial regime to ‘out of community of property’ by registering a Postnuptial Contract with the High Court in terms of Section 21(1) of the Matrimonial Property Act. In your application to court, you’ll be asked to provide the Court with good reason for the proposed change; give notice of the proposed change to all your creditors and to the Registrar of Deeds; and then satisfy the Court that no other person will be prejudiced by the change.
Many couples provide business ownership as a reason for the proposed change in matrimonial regime. You’ll also need to attach draft antenuptial contract to your application for the court to review.
If you own any immovable property at the time of your application, any title deeds or mortgage bonds would have to be endorsed, so it’s important to involve an experienced attorney and conveyancer to assist you with the technicalities.
How to protect your business against changes in personal circumstances: agreements
Your partnership or shareholder agreements and your company’s Memorandum of Incorporation (MOI) should include provisions that would protect the interests of the other owners if one of the owners gets divorced.
For example, your agreement could state that:
- Unmarried shareholders must provide the company with a copy of their antenuptial contract before getting married, along with a waiver by the owner’s spouse-to-be of his or her future interest in the business.
- Transfer of shares without the approval of the other partners or shareholders would be prohibited and the other partners or shareholders would hold a pre-emptive right to purchase the shares or interest of one or both of the divorcing parties, in the event of a divorce, so that the other owners can maintain control of the business. This clause would have to be accompanied by a consent of the spouse in cases where the couple is married in community of property.
It’s always a good idea to consult an experienced company lawyer when setting up your business structure and business agreements, because a surprisingly large number of MOIs and partnership agreements fail to consider the implications of changes in personal circumstances on the business operations. If you suspect that your current agreements do not cover the possibility of divorce fall-out, have all your documents assessed by your attorney.