When is company property considered as matrimonial common property?
If no marital property contract has been concluded between the spouses – to agree on the separate property nature of the company – the business shares (shares, members' contribution) acquired during the marriage in the name of either party are the community property of the spouses. If one of the spouses is a member of a company in which that spouse's contribution has been secured out of the community property, the business share will also be the community property of the spouses.
Irrespective of the fact that only one spouse is listed as the owner of a company, the business share is part of the matrimonial community of property and is the "undivided common" property of the spouses in family law terms. Business share in a company is an asset at any stage in the life of the company, whether it is a newly established company or a company that has been in operation for more than 10 years.
If only one spouse is the registered owner of the jointly owned business share, he or she may exercise their rights as member or shareholder independently, without the consent of their spouse, but must have due regard to the interests of the spouse and may be liable for any loss resulting from failure to do so.
Company assets as separate property - who is entitled to the profits and dividends?
However, share in a business owned by one of the spouses is separate property if acquired or inherited before the cohabitation, received as a gift or, if a property contract between the parties provides for it as separate property.
However, during cohabitation, the proceeds from such separate property– typically dividends – are the common property of the spouses.
The dividend, as the proceeds from the separate property business share, is the common property of the spouses if it was generated during the period of the marital community. Therefore, if the cohabitation between the parties has ceased, regardless of the fact that neither divorce nor the division of the community of property has taken place, the proceeds of the separate property are no longer common property, and only the owner of the separate property is entitled to the benefits of the separate property for the period following the termination of the cohabitation.
From the point of view of matrimonial property law, the date when the benefit is generated is the date of the declaration of dividends at the general meeting, i.e. the dividend claim is already a common property benefit. However, if, during the period of cohabitation, the general meeting of a company which is otherwise separate property does not declare to distribute the profits as dividends, the profits accumulated in the company are not included in the community property.
Accordingly, the increase in the value of the share of a spouse's separate property that occurred during the period of cohabitation and is attributable solely to the operation of the property is not considered the proceeds of the separate property and therefore does not form part of the community property, just as the exchange rate gain on such share does not become community property.
Which spouse's receivable is the member's loan?
A member’s loan granted by a spouse to the company from the common property is the joint receivable of the spouses by the general rule, with the company as debtor. If the member's loan is proved to have been granted out of separate property, the resulting receivables retain their separate property nature – representing the value from the separate property.
What happens to the jointly owned company in case of divorce? - The problem of determining the value of a company
In the case of the division of property, the balance sheet must show the share in the company, with the respective value. A non-member spouse has a right for settlement in respect of his/her spouse's share in the company, or the member spouse may, if the articles of association so permit, share his/her share with the spouse.
In most cases, the owners of the company themselves are not aware of the value of their share in the company, the determination of which is one of the key issues. In the case of the division of property, whether by agreement between the parties or in litigation, the most important issue is to decide which method and valuation procedure can best determine the market - commercial - value of the share.
Businesses engaged in different activities or services can and should be assessed using different methods. It would be simple to determine value based on the available data, starting from the company's books: total assets – total liabilities = equity, i.e. company value. However, this type of asset valuation – based on accounting – is not suitable for determining the market or business value of a company and fails to consider the fair market value of the assets in the company or the company's growth potential.
Upon the division of the matrimonial common property the share of a member of the company should not be entered in the balance sheet at book value but at actual market value.
In judicial practice, the market value of a property or other asset or service is to be understood as the purchase price which is/would be obtainable in the event of a transfer of the property or other asset or service in question, depending on the changes of supply and demand.
The business valuation used in asset division is to find out what the market value of the company is.
When acquiring a company, we are not only buying the assets and liabilities (business assets) of the company, which can be calculated using the so-called asset-based valuation, which basically gives the value that the owners of the company would receive in the event of liquidation (the so-called liquidation value). We must also consider the company’s profit generating ability as the result of its operations. This income, or more precisely the expected future cash flow, needs to be assessed in order to determine what the firm is worth today (the so-called going concern value). This business value can be determined, for example, by the discounted cash flow method (i.e. a valuation based on future projections),but also by the multiplier method based on EBITDA or profit after tax to determine the estimated value of the business to an external investor. Our experience and case law suggest that a combination of several methods can lead to a more accurate assessment of the market value of a company.
Since the division of property is essentially based on the date of the termination of the cohabitation, attention should also be paid to the period (even as long as several years) between the termination of the cohabitation and the expert's valuation. In such cases, it is also necessary to examine the reasons for the economic changes in the operation of the business, which may be the result of deliberate removal of assets by the owner spouse, his/her omissions or reasons certifiably outside their control.
The selection of an expert with the appropriate expertise and practical experience also requires particular care, as business valuation is a specialised segment of the expert's work.
Division of company assets
The spouses who share the matrimonial property are free to agree on the division of the share in the company and its redemption by the other party. Thus, the share in the company belonging to the community property becomes the exclusive property of one spouse, with the other spouse’s claim settled, but they may also decide jointly to sell the share to a third party.
In court proceedings, a division which does not result in a change of member is preferred. In this case, the court, with the assistance of a forensic expert, determines the value of the business share and enters it in the balance sheet on the side of the spouse who has solely acquired the share, while the other spouse is entitled to compensation for his or her share: by monetary payment or other assets. The other type of division results in a change of member, where the non-member spouse or a third party acquires the share - according to the rules governing transfers between members.
As long as the marriage is not terminated, the parties typically do not even think about assessing the company assets, recognising the business shares and defining the exact rate of ownership.
Our experience shows that in the case of broken marriages, there is very little cooperation between the (former) spouses in the joint company, which can lead to problems even in a well-functioning business. This is why in most cases it leads to the termination of the joint ownership. Asset division is easier if public records show the actual ownership structure.
Hidden assets – What I don't know doesn't exist?
In an increasing number of marriages, one party deliberately fails to inform his or her spouse that he or she has acquired shares in a company(ies) during the marriage and does not even mention this at the time of divorce.
Although this asset is not included in the balance sheet, it is still part of the matrimonial community of property and the party concealing the assets is accountable towards his or her spouse. Thus, if it subsequently emerges, after the divorce, that an item of community property was not considered for the division of property, in particular if this is due to fraudulent conduct on the part of the spouse, it is possible to apply for the division of such property subsequently.
RSM's experienced family law attorneys, partners and business valuation (M&A) specialists can assist you in determining the value of your business assets and in their division, either out of court or in litigation.