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Divorce: the family business can go bust if you don't prepare in advance

Although in Hungary many people shy away from the idea of a prenup for emotional reasons, it is irresponsible for couples who run a joint business not to consider a negative scenario. Not only can costly and protracted litigation be avoided in divorce by a prenuptial property agreement, but the future of the family business could well depend on it. The number of contracts designed to protect family assets registered in the Register of Matrimonial and Cohabitation Property Contracts is increasing every year.

According to the Hungarian Central Statistical Office (KSH), 72,000 marriages were entered into in 2021, breaking a 35-year record as the last time the number of marriages reached this level was in 1986.  The number of divorces per year has steadily decreased from 24-25 thousand in the decade after the turn of the millennium, and in 2014, for the first time in 50 years, the number remained below 20 thousand.  For the last 4-5 years, 17-18 thousand marriages have ended in divorce every year. In addition to the number of divorces, the increase in the age of the spouses divorcing is worth noting, which has risen to over 45 for men and over 42 for women since 2018.  

The family business is not easy to split in a divorce

Despite the positive divorce statistics, there is a significant number of people who, in addition to losing half of their private assets, also lose their family business in the divorce. The reason is that income from business activities started during the marriage is considered common property.

The increasing age of the divorcing spouses suggests that more and more family businesses are becoming victims of asset division. 

Company assets, i.e. real estate or motor vehicles owned by the company, cannot be included in the scope of the division of property, only the spouse's share in the company can be considered as common or separate property. 

In the case of a private limited company, it is necessary to examine the common or separate nature of the business share held by the spouse as a member or the shares held by the spouse as a shareholder.  If the common property nature of the shareholding can be established, the spouse who is not registered as a member can request a declaration of common property in respect of the business share in the division of the matrimonial common property. It is important to stress, however, that this does not apply to the ownership of the assets in the company, which can only be claimed from the spouse as a settlement claim in a property division. 

Termination of matrimonial community of property vs division of company assets

However, the division of shares in companies that are part of common property can raise a number of questions. The spouses may terminate the matrimonial community of property, including the common property in the company, in any out-of-court agreement, or provide for the separate property nature of the business share. 

If the dissolution of the community of matrimonial property is sought in court proceedings, the court will decide on the basis of a joint declaration of the spouses, if possible, and if there is no agreement on this issue, the business share acquired from common property will typically remain in the name of the spouse who holds it, while the other party may claim the consideration for his or her share in the business. If a private limited company was established from common property by one spouse, dividing it and giving part of it to the spouse may be an option if the property compensation corresponding to the share – i.e. primarily the redemption of the value of the share – cannot be given in any other way, taking into account the principles of expediency, proportionality and fairness. 

Note that in the case of business shares, the rules applicable to the company concerned will also affect whether the non-member spouse can acquire any interest at all through the division of property.

Thus, for example, the redemption of the shareholding will have to be dealt with differently if the members of the company do not consent to the entry of the new member under the terms of the company's articles of association, or if the articles of association preclude the possibility of the spouse acquiring a shareholding in the company by way of a division of property. It is important to underline that, if such restrictions exist, they will also apply in the presence of a matrimonial contract, so due care must be taken to ensure that the method of division provided for in the contract is enforceable against the company and does not conflict with its internal rules. 

In the case of property division, particular problems are the joint operation of the company forming part of separate property by the spouses and gains from any increase in the value of the company.  In the case of  business share belonging to common property, it should be borne in mind that in potential court proceedings, the share of a non-member spouse in the assets may be determined as a result of a difficult and cumbersome evidentiary procedure.

How much is the family business worth?

One of the key issues in the case of business shares is the valuation of the company, as the value of the shareholding is typically not equal to the value of the assets owned by the company.  Also in the case of business shares, the spouse's share and its value should be determined according to the status and value at the time of the termination of the community of matrimonial property.

Any change in value from the termination of cohabitation to the date of division should be taken into account only if it is not the result of the conduct of one of the spouses. 

The parties to a property division can have the value of the business determined in an extrajudicial procedure, whereas in a court case the value is typically determined by the court on the basis of lengthy and costly expert procedures. It is also important to know that in an out-of-court procedure, an independent expert can carry out the valuation of the company, whereas in court proceedings only a forensic expert can be appointed.  In the latter case, the forensic accountant may start from the book value and may not necessarily use the market valuation methodology.

In principle, it is also possible to request the sale of the share to a third party, in which case the proceeds are divided between the spouses, but it is rare that the share is sold at fair value, which can be disadvantageous for both parties. 

How does the matrimonial property contract protect family assets?

A matrimonial property contract is a great help in a divorce: thanks to a clearer property situation, court proceedings that could drag on for several years can be shortened considerably. 

The great advantage of a matrimonial property contract is that it establishes a different regime from the community property regime established by law and clarifies the ownership of certain assets, such as the separate or common property nature of a business share, and can also regulate the distribution of the benefits from company shares. Whether the contract is advantageous or disadvantageous to one party or the other depends on the situation, but in most cases it provides security for both parties.  It is important to note that for a matrimonial property contract to be valid, it must be recorded in a notarial deed or a private deed countersigned by a lawyer, so that the parties are essentially guaranteed to be properly informed of their rights before the contract is concluded.  The contract will only have legal effect on others if it has been entered in the national register of matrimonial property contracts or if the spouses prove that the third party creditor knew or should have known of the existence of the contract and its content. The register only provides public proof of the existence of the property contract and its contents can only be disclosed with the consent of one of the spouses. 

According to the Hungarian Chamber of Notaries (MOKK),while in the past one out of four marital property contracts were specifically designed to protect part of the property from a possible debt and to exempt the spouse and the common family property from the liability for a new property loan, a business or a possible future damage, such as medical malpractice, today an increasing number of contracts is designed to protect the family property. In recent years, a significant number of property contracts has been registered by remarried couples, many including provisions on the assets of the estate.  According to MOKK data, the number of contracts registered in the Register of Matrimonial and Cohabitation Property Contracts had doubled in the two years prior to 2017, with around 1,000 new registrations per year, and the number of registrations of these contracts in 2021 increased by 9% compared to the previous year. 

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