Business Interests and Relationship Property: What Happens on Separation?

Holding shares in a company that owns a business can add another layer of complexity when a relationship ends.

A company is a separate legal entity and owns its own assets, such as stock, equipment, contracts and goodwill. A shareholder owns shares in the company, rather than actually owning the company's assets. That distinction is important s, but it does not necessarily mean the value of your shares falls outside the relationship property regime.

If company shares are relationship property, their value will generally need to be taken into account as part of the overall division of relationship property. Even where the shares themselves are separate property, an increase in their value, or income or gains derived from them, may in some circumstances be relationship property. 

Where both partners are involved in the company, there can be a further layer to consider. The company's constitution, any shareholders' agreement and the parties' respective roles as shareholders, directors or employees may all affect what happens following separation.

Relationship property and company law issues often need to be considered together.

When are company shares relationship property?

As a general rule, shares acquired during a marriage, civil union or de facto relationship will be relationship property, even if they are held in only one partner's name. There are, however, important exceptions. For example, shares acquired using separate property may themselves be separate property.

Even where shares are separate property, that does not necessarily mean everything associated with them will remain separate. Income or gains derived from the shares, or an increase in their value, may become relationship property in some circumstances. For example, issues may arise where relationship property is applied to the business, where income or gains from the shares are used to acquire or improve relationship property, or where the other partner contributes to an increase in the value of the shares.

It is also not necessarily an answer to say that one partner had nothing to do with the business. Shares acquired during the relationship may still be relationship property even where only one partner worked in or operated the business. Relationship property law recognises both financial and non-financial contributions to a relationship. This includes caring for the home or children while the other partner devotes their time and energy to the business.

That does not mean that each party automatically becomes entitled to half of the company or that the shares themselves must be transferred or divided equally. Rather, the shares must be classified and, where relevant, valued as part of the overall relationship property exercise. The share value is then taken into account in the overall division of relationship property.

What if I owned the business before the relationship?

Shares owned before the relationship will generally start as separate property. Shares acquired during the relationship may also be separate property where, for example, they were acquired out of separate property. However, that does not necessarily mean that everything associated with the shares will remain separate. Issues can arise where during the relationship:

1. Relationship money has been put into the business;
2. Additional shares have been acquired;
3. Either partner has contributed to the growth of the business; or
4. The value of the business (and accordingly the shares) has increased as a result of contributions made during the relationship.

In those circumstances, the underlying shares may remain separate property while some or all of the increase in their value, or income or gains derived from them, may be relationship property. The focus may therefore be on what caused the increase in value or how the income or gains were used, rather than on treating the whole shareholding as relationship property.

This makes evidence about the source of the funds used to acquire the shares, the share value at the beginning of the relationship, how the business has been funded, how income or gains from the shares have been used, and what has driven any growth in value particularly important.

What happens to the company if you separate?

Where shares, or their value, must be accounted for in the relationship property division,

a common practical outcome is for the person who operates the business to retain their shares, with the other partner receiving other relationship property or an equalisation payment as part of the overall settlement. An independent share valuation may be needed to work out what the shares are worth.

However, where both partners are involved in the company, separation can raise a second set of issues.

If both partners are shareholders and/or directors, the end of your personal relationship does not automatically end your commercial relationship. The company's constitution and any shareholders' agreement continue to apply and may be important in determining voting rights, how decisions are made, whether shares can be transferred, how they are valued, and what happens if the shareholders reach a deadlock.

Likewise, if both partners work for the company, their employment arrangements do not simply disappear because they have separated.

For that reason, when a business is involved, we will often need to look beyond the Companies Register and review the wider company structure, including the constitution, shareholders' agreement, shareholder loans and current accounts, financial information, and any trust or relationship property arrangements that sit alongside them. Credit balances in shareholder current accounts and loans owed by the company to a shareholder may themselves need to be separately classified and valued.

What happens after separation can matter too

Relationship property matters involving a business are not always resolved quickly. In the meantime, someone normally needs to keep running the business.

What happens during that period can be relevant to the eventual outcome as well.

For example, where one partner continues working in and contributing to the business after separation, there may be circumstances where those post-separation contributions need to be taken into account in the eventual division. Conversely, deliberate steps to dissipate company or relationship property, or to reduce the value available for division, can also have consequences.

That does not mean a business owner is responsible every time a business loses value after separation. Businesses rise and fall for ordinary commercial reasons, and the Courts recognise the need to distinguish genuine commercial decisions from deliberate conduct intended to reduce the value available for division.

This is one reason we recommend getting advice before making significant changes to the business following separation, particularly around share ownership, major transactions, company assets, distributions or remuneration.

Relationship property law is only part of the picture

Where a company is involved, it is important not to look at the relationship property issues in isolation.

Directors continue to owe duties to the company under the Companies Act 1993, regardless of the breakdown of their personal relationship. A director cannot simply treat company money or assets as their own because they regard the business as "theirs".

If both partners are shareholders or directors and their relationship has broken down, separate company law issues can also arise. This can include disputes about control of the company, access to information, use of company funds, exclusion from management, or an inability to agree on important business decisions. There are remedies available under the Companies Act where those disputes cannot be resolved commercially.

The important point is that a separation involving a company can be both a relationship property matter and a commercial matter, and the two need to be considered together.

Planning ahead

If a business makes up a significant part of your personal wealth, it is worth considering the position before a separation is on the horizon.

A contracting-out agreement, sometimes called a "prenup", can set out how existing or future company shares are to be treated and, importantly, how any future increase in their value, or income or gains derived from them, will be dealt with if the relationship ends.

For business owners, that agreement should not necessarily be considered in isolation. It may also be appropriate to review the company's constitution, shareholders' agreement, trust arrangements and succession planning to make sure those documents work together.

Planning at the outset can provide considerably more certainty for both the business and the people behind it.

How we can help

We regularly advise business owners at both ends of this process, whether that means protecting an existing business through a contracting-out agreement, or working through the company and relationship property issues following a separation.

If you own a business and are separating or simply want to understand how your relationship property arrangements may affect your business, getting advice early can help protect the value and ongoing operation of the business.