Introduction
Suddenly, you're on the verge of divorce and the question arises as to what will happen to the shares of the company you've built up over the last few years. In the event of divorce, the following scenarios can occur in connection with the entrepreneur's shares:
- If the shares were acquired before the conclusion of the marriage, the shares remain the sole property of the spouse to date, but at most an industrial added value in the shares must be shared with the spouse.
- If the shares were acquired during the marriage, they are to be divided equally with the spouse at most.
What does this mean exactly?
If spouses in Switzerland have not concluded a marriage contract, they are subject to the ordinary matrimonial property regime of the participation in acquired property (Errungenschaftsbeteiligung). The participation in acquired property regulates that each spouse owns two estates: personal property and half of the claim to the acquired property – i.e. the assets earned during the marriage. Corporate shares can regularly make up a significant part of a spouse's assets.
Buying shares before marriage
Scenario: A is a co-owner of IT-Tech AG. One year after the company was founded, A and B get married. You do not conclude a prenuptial agreement. During the marriage, which lasted several years, IT-Tech AG developed into a successful company, which is why the shares also gained considerable value. A and B divorce ensue. What does A have to fear?
- Personal property: If a spouse founds a company before the marriage and subscribes to shares, he or she has contributed the shares to the marriage. Assets brought into the marriage constitute personal property. In the event of a divorce, this means that he does not have to share the shares with his spouse. Rather, he retains his entire personal property and thus also his shares.
- Equalisation of added value: However, if the shares have increased in value during the marriage, the spouse may still have a claim. The decisive factor here is whether the increase in value was due to cyclical (general market developments) or industrial (specific entrepreneurial achievements such as innovations or efficiency improvements) reasons. In the case of SMEs, the increase in the value of company shares is regularly due to industrial reasons. This entrepreneurial performance of the spouse is to be regarded as a normal occupation, which is why such an increase in the value of the shares is also treated as usual wages under matrimonial property law. The spouse is therefore entitled to half of the increase in the value of the company shares. In this case, if the spouse does not have any liquid assets, as the shares make up a large part of his assets, he or she must sell his company shares to a business partner in order to get money.
Stock acquisition during marriage
Scenario: A and B get married. You do not conclude a prenuptial agreement. During the marriage, A founds IT-Tech AG with two co-owners. A subscribes to the shares with the money from his private account, which he accumulated during the marriage. During the marriage, which lasted several years, IT-Tech AG developed into a successful company, which is why the shares also gained considerable value. A and B divorce ensue. What does A have to fear?
- Basically an acquired property: If a spouse only founds a company during the marriage and subscribes to shares, these shares are generally to be qualified as acquired property.
- Exceptional personal property: The case in which the spouse can prove that he or she financed the company with personal property (gift, inheritance, advance on inheritance) is reserved – in this case, the shares also belong to the assets of the personal property.
- Half division: In the event of divorce, the acquired property is to be divided in half. In this case, the wife could either claim the surrender of half of the company shares or demand compensation for the settlement of the value of these half shares.
- Equalization of added value: If the shares have also experienced industrial added value in this case, the same applies here as if the shares had been acquired before marriage: There is an entitlement to half of the added value of the shares.
Ways to prevent the transfer of company shares
There are also versatile solutions for the different scenarios. For example, entrepreneurs can protect their company shares through targeted provisions in a marriage contract or a shareholders' agreement (SHA).
1. Prenuptial agreement: an effective tool
A marriage contract is a contract under private law that must be publicly notarized. This contract can be used to regulate the financial circumstances of the spouses. This offers various options for protecting company shares from division in the event of divorce. The marriage contract can be concluded shortly before the marriage or during the marriage. The central control options are:
- Separation of property: By agreeing on the separation of property, the assets are not divided in the event of divorce. In this case, the matrimonial property situation is comparable to the situation of unmarried civil partners. This can ensure that the company shares do not have to be divided in the event of a divorce. Each spouse retains his or her assets in full, and there are no claims by the other spouse to the company's shares.
- Exclusion of participation in acquired property and declaration of personal property (Art. 199 Swiss Civil Code): As already mentioned, the assets of the acquired property are divided in half in the event of a divorce. If parts of the company belong to the acquired property (since they were acquired with income earned during the marriage), there is a risk that too much substance will be removed from the company in the event of a divorce and the associated division of the acquired property. For this reason, the law provides in Article 199 of the Civil Code for the possibility of determining, by means of a marriage contract, certain Assets, which are intended for the professional and commercial activity of a spouse and are in principle allocated to the estate of the acquired property, are to be declared as personal property. These specific assets thus change the mass of goods. Since the personal property remains with the respective spouse, there is no division of the entrepreneur's shares. These thus remain the property of the entrepreneurial spouse after the divorce, regardless of the source of financing. The same can also be said in the marriage contract for the economic growth in value of the entrepreneur's shares.
Particular attention should be paid to the possibility of Income from personal property – which in principle belong to the acquired property – to the own property itself. In the present case, the dividends from the entrepreneurs' shares are addressed. In the marriage contract, the spouses can stipulate that the dividends are the property of the entrepreneurial spouse and do not have to be shared with the other spouse in the event of divorce. The prerequisite for such a regulation is that the entrepreneurially active spouse pays himself or herself an appropriate wage for his or her work, which is part of the acquired property and can be divided on the occasion of the divorce. This provision is intended to prevent the entrepreneurially active spouse from paying each other only dividends and no wages, so that the other spouse ultimately comes away empty-handed. Last but not least, in such a case, the social insurance funds would also become aware of the entrepreneurial spouse and requalify part of the dividend distributions into wages subject to social contributions. - Severance pay: In the prenuptial agreement, it can also be agreed that in the event of divorce, the spouse will receive a severance payment that does not include the company shares. This prevents the spouse from receiving shares in the company through the divorce. However, such a provision does not help in the event that the spouse who is active in business lacks the liquid funds to make the compensation under matrimonial property law. However, the regulation on severance pay can prove to be useful in good financial circumstances.
It is important to always take into account the possible consequences under inheritance law when drafting the marriage contract.
2. Shareholders' Agreement (SHA): An additional protection
An SHA is a contract between the shareholders of a company that regulates their rights and obligations in connection with the shares. It can be an additional protective measure, especially in combination with a prenuptial agreement:
- Sales rights: The matrimonial property dispute associated with the divorce can lead to the transfer of shares from one spouse to the other. To ensure that the shares unintentionally end up in the hands of spouses who have not previously been involved in the company or who pursue other entrepreneurial interests than the original shareholders, the shareholders of the company can provide for various purchase rights in an SHA. A sales law could regulate that the shareholders have the right to acquire the shares from a shareholder in the event of a divorce before they are transferred to a previously uninvolved spouse in the context of the matrimonial property dispute. The right to purchase is regularly structured in such a way that the shareholder in divorce is obliged to inform the other shareholders of his situation and the other shareholders can subsequently exercise their call option at a predefined price and acquire the shares. By implementing such purchase rights, the company remains in the hands of the original shareholders and control over the company is not jeopardized.
- Conversion of shares into non-voting shares: Another important tool is the possibility of converting shares into non-voting shares. This provision can be anchored in the SHA in such a way that shares are transferred to the spouse in the course of a divorce, but these shares lose their voting rights. The conversion into non-voting shares preserves the economic participation of the spouse but limits his or her influence on the management of the company. This allows the original shareholders to retain control of the company while maintaining the economic value of the shares for the spouse as a new shareholder. This measure ensures that strategic decisions continue to be made by those who built the company and pursue long-term interests.
- Restriction: The restriction ensures that there are no undesirable changes in the ownership structure of the company. Restriction is often found in family-run companies or smaller corporations. In the case of restricted registered shares, the transfer of shares requires the consent of the company or the shareholders. If there are registered shares with restricted transfers, the company may refuse to consent to the transfer for important reasons. However, in cases where the shares are transferred by operation of law (e.g. inheritance, matrimonial property dispute), the company cannot rely on an important reason for refusing the transfer of registered shares. If the other spouse wants to take over the registered shares in the context of the divorce, the company has the option of invoking the so-called "escape clause" as a "stopgap". Specifically, the company can reject the request for approval if it offers the acquirer or spouse the takeover of the shares at their real value (Art. 685b para. 4 CO). If the spouse accepts the company's takeover offer, he or she will never become the owner of the registered shares but will benefit once and indirectly from the compensated value of these registered shares.
Result
Protecting company stock in the event of a divorce requires forward-looking planning and strategic precautions. By concluding a prenuptial agreement, entrepreneurs can clearly regulate their financial circumstances and ensure that their company shares do not have to be divided unintentionally. In addition, an SHA can provide additional security to prevent an uncontrolled transfer of shares. With these measures, entrepreneurs can preserve the long-term success and existence of their company even in the event of divorce.
Finally, a thoughtful suggestion
When designing the restrictions on disposal, however, it is always important to ensure that the right balance is found between immobility and mobility of the shares. The restrictions on disposition should not "only" be designed from the point of view of a possible future divorce in order to have prevented this in this case. Rather, the structuring of the shares requires an overall consideration and coordination with the holistic, individual needs of a company.
It goes on...
What questions arise for holders of entrepreneurial shares in the event of inheritance and what planning instruments they can use to remedy this can be read in one of our following blog posts.
