Shareholder agreements and divorce

Shareholder agreements and their treatment in divorce is a question that often arises when one or both of the parties in the divorce have an interest in a private limited company.

In my experience, the effect of a shareholder agreement tends to be viewed through the prism of its impact upon the capital value of that person’s shares and the effect the agreement may have upon the ability to withdraw income from a company.  In other words, how does the shareholder agreement impact the individual’s financial position as this will be an important consideration in divorce proceedings.

In my view, it is necessary to consider:

  1. What the terms of the shareholder agreement are; and
  2. Whether it may be possible for the shareholder agreement to be varied.

The terms of the shareholders’ agreement

A shareholder agreement can, depending upon its terms, affect the capital value of an individual’s shares in the company if there are restrictions upon those shares being sold or transferred.  It can also affect the ability to draw income from the company if, for example, there is an agreement that profits will be retained in the company for future investments.

However, it is always necessary to consider the shareholder agreement as a whole.  Even when there are restrictions on the ability to transfer or sell shares in a company which on the face of it reduces the value of a shareholding, there is often an agreed mechanism within the shareholders’ agreement to suggest how a fair valuation is to be arrived at if the shares are being sold to the other shareholders.

Therefore, whilst one party will often point to a shareholder agreement in an effort to suggest that their shares are effectively worthless, this is not always the case and should not be taken at face value.

Whether it may be possible for the shareholder agreement to be varied

It is important to consider whether it may be possible for the terms of the shareholder agreement to be varied for example if the level of the shareholding owned by a party has changed or there has been a change to the structure of the company since the shareholder agreement was entered into as it may be possible to vary the agreement.

However, this would be unusual. One of the main purposes of a shareholders’ agreement is to provide security to the shareholders and if it is possible for the agreement to be individually varied by one person then it would not be providing that security.

The need for expert advice

If either party has an interest in a limited company with a shareholders’ agreement in place, I recommend seeking advice from an expert, typically an accountant, to determine the value of that person’s shares and the ability for income to be withdrawn from a company. The shareholders’ agreement will be a document that would need to be considered carefully as the terms can impact the financial decisions made during the divorce.

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