Still Your Business, Post Divorce?

Divorce can be a challenging and emotional process, but for business owners, it often introduces another level of complexity. Business ownership becomes especially vulnerable during divorce proceedings, and depending on the matrimonial property regime involved, the value of the business may be subject to division. Even where you are a registered shareholder or owner (and your ex-spouse is not), your ex-spouse may have a claim to part of the business if it falls within the definition of marital property. From the division of assets to the potential disruption of operations, the goal is to protect your interests, assets, and, most importantly, the future of the business.

Lessons from the De Sousa Case

This complexity is evident in the case of De Sousa v Technology Corporate Management (Pty) Ltd and Others[1], which dealt with the division of the husband’s shares in a technology company post-divorce. Due to their marriage in a community of property, Sharon (the wife) instituted a claim for half of De Sousa’s (the husband) shares in Technology Corporate Management (Pty) Ltd (“TCM”).

Mr De Sousa became involved in an information technology business with Mr Cornelli during the late 1980s and early 1990s. From very humble beginnings at that time, TCM, of which De Sousa and Cornelli were the founding fathers, was built up into a multimillion-rand enterprise, the turnover of which was estimated to have grown to over 1 billion rands in recent years. Several other shareholders had been introduced along the way. Clause 22 of the Shareholders Agreement prohibits the cession or transfer of rights without the prior written consent of all the parties to the shareholders' agreement.

De Sousa’s TCM shares were the greatest asset in the joint marital estate. Sharon, however, argued that she had a legal entitlement to have 15% of the shares registered in her name. However, the court found that the effect of the granting of the order of divorce is to bring an end to the community of property that previously existed between Sharon and De Sousa and to require an equal division of the joint estate after payment of liabilities (see Meyer v Thompson NO 1971(3) SA 376 (D) at 377 F). Thus, she could not claim any asset of the joint estate in specie or an undivided form and was merely entitled to a share of the net proceeds of the joint estate after the realisation of liabilities.  

Millions of rands later in legal costs, the court found in de Sousa’s favour and ordered that the costs payable to De Sousa should be deducted from Sharon's half share of the residue of the joint estate upon the division thereof. This type of ownership dynamic illustrates how divorce can affect not just physical assets but shares and business interests as well.

For business owners, divorce presents several legal challenges, including:

• Asset valuation: Determining the value of a business is a complex process, and differing valuations can lead to disputes.
• Division of business assets: Depending on the marital regime, you may have to divide shares, profits, or in some cases ownership.
• Registered vs beneficial ownership: Disputes can arise regarding who is entitled to dividends or control over shares, as illustrated by the de Sousa case.

Protecting Your Business Before Marriage

One of the best ways to protect your business from being included in the marital estate is through an antenuptial (aka prenuptial agreement) or postnuptial agreement. These agreements can define which assets remain separate and ensure that your business remains secure in the event of a divorce.

A prenuptial agreement is made before the marriage, and your business can expressly be excluded from the divorce proceedings or the accrual. This is a valuable tool for business owners who wish to protect the assets they have worked hard to build. A postnuptial agreement serves the same purpose but is created after the marriage has taken place. It offers business owners a second chance to secure their assets if they have yet to make a prenuptial agreement. However, this is not always viable as postnuptial agreements hinge on the High Court’s discretion.

Shareholder Agreements and MOIs

Another safeguard would be to specifically address divorce in the MOI and shareholder agreements governing the business. This critical measure ensures that control of the business remains within the intended group and that a shareholder’s divorce proceedings do not financially burden or interfere with the business. It is crucial to ensure that the business continues to operate smoothly during the divorce process. A clear business continuity plan can help manage operations and maintain profitability while personal matters are settled.

Conclusion

Divorce and business ownership can be a complicated mix, but with the right approach, you can protect your assets and business interests. Understanding how matrimonial property regimes apply to your situation and having prenuptial agreements in place is vital to minimising the impact.

With the help of skilled legal professionals and careful planning, you can ensure that both your personal and business interests are safeguarded. However, the process of protecting your business assets is best implemented from the commencement of business operations and marriage before any claims arise.

Contact an expert at SchoemanLaw to assist you in navigating the business and family complexities during a divorce.

[1] De Sousa v De Sousa and Another (40036/16; 35926/16) [2018] ZAGPJHC 445 (23 February 2018)