Separation or divorce and your BC company: how family law can reach business shares

For many business owners, the company is the largest asset in the family. When a relationship ends, the question of who owns the shares quickly becomes a question of what they are worth and how the value will be shared.

This guide explains how BC's Family Law Act treats business shares, when a business or part of its value is excluded, how courts value and divide a company, and why shareholders' agreements and marriage or cohabitation agreements matter.

Is your company family property?

Under BC's Family Law Act, family property includes all property owned by at least one spouse on the date they separate, and the Act lists "a share or an interest in a corporation" and an interest in a partnership or business as examples. It does not matter that only one spouse is a shareholder or that the other spouse never worked in the business. The Act's starting point is that, on separation, each spouse has a right to an undivided half interest in all family property, regardless of their respective use or contribution.

These rules apply to married spouses and to unmarried spouses who lived together in a marriage-like relationship for at least two years. Unlike some other parts of the Act, having a child together does not on its own make unmarried partners spouses for property division.

Our guide to family property division in BC covers the general framework. This article focuses on what it means when one of the assets is a business.

When a business, or part of it, is excluded

Some property is excluded from family property. For a business owner, the most relevant categories are:

• property you owned before the relationship began, such as shares in a company you incorporated before you moved in together
• shares you inherited, or received as a gift from someone other than your spouse
• property derived from excluded property, for example shares received in exchange for excluded shares in a reorganization

There is an important catch. The Act treats as family property the amount by which excluded property has increased in value since the later of the date the relationship began or the date the property was acquired. If you started your company before the relationship and it grew during it, the growth can be shared even though the original shares are excluded.

The Act also puts the burden on the spouse claiming an exclusion to prove it. Records of what the business was worth when the relationship started, such as financial statements, a valuation or a purchase agreement, can matter years later. Our article on inheritances, gifts and excluded property explains the exclusions in more detail.

How the business is valued

Unless an agreement or order says otherwise, family property is valued at fair market value as of the date of the agreement dividing it or the date of the court hearing, not the date of separation. A business that grows or shrinks while the separation is being resolved can change the numbers.

Valuing a private company is rarely simple. A business valuator may need to consider goodwill, retained earnings, shareholder loans, the value of personal services the owner provides, and the tax that would be payable if shares or assets were sold. Each spouse may retain their own valuator, and the company's financial records will usually be part of the financial disclosure exchanged during a separation.

How a court can divide it

Dividing a company does not usually mean giving half the shares to the other spouse. The Supreme Court has broad powers to give effect to a division, including ordering one spouse to pay compensation to the other, ordering property transferred, held in trust or sold, and requiring security for payment.

The court can also order an unequal division if equal division would be significantly unfair. Factors it may consider include the length of the relationship, the terms of any agreement, whether a spouse caused a significant change in value after separation beyond market trends, whether a spouse acting other than in good faith reduced the value of family property or moved it out of reach, and a tax liability that may result from a transfer or sale. Excluded property can be divided only in limited circumstances.

What it means for your co-owners

Your business partners are not parties to your separation, but they can be affected by it. A settlement or court order may require a payment that the owner spouse funds by selling shares, borrowing against the business or drawing on company money. Requests for disclosure may reach the company's books.

This is where the company's own documents matter:

• Articles. Private company articles commonly restrict share transfers, for example by requiring director approval.
• Shareholders' agreement. A well-drafted shareholders' agreement can set out buy-sell rights, valuation methods and what happens if a shareholder separates, so that co-owners are not left negotiating with a former spouse.
• Personal guarantees and shareholder loans. These can be relevant to both the business and the family property calculation.

Planning ahead

Spouses can make written agreements about property division, including agreements to exclude property that would otherwise be family property or to value it differently. A marriage agreement or cohabitation agreement that deals specifically with a business, paired with an up-to-date shareholders' agreement, can give everyone more certainty. These agreements can be challenged in some circumstances, so independent legal advice and full disclosure matter.

If you have already separated, time limits apply to property claims. Our article on family law deadlines in BC explains them.

Own a business and facing separation? Protect the company and your co-owners

Our business lawyers can review your company's articles and shareholders' agreement, explain how a separation may affect the business and your co-owners, and work with your family lawyer on share transfers, buyouts and agreements that protect the company.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.