Divorce can be a complex and emotionally challenging process, especially when it involves the intersection of business and family. In Hong Kong, many individuals find themselves grappling with the complexities of untangling corporate interests during divorce proceedings. It is essential to explore the key issues that individuals should bear in mind when navigating a divorce involving business assets in Hong Kong.
Understanding the legal framework in Hong Kong
In Hong Kong, the reasons behind the breakdown of the marriage are generally not considered when determining financial arrangements. However, the court has broad discretion in distributing assets, taking into account various factors, including the conduct of the parties (particularly where this relates to finances and if such conduct has been ‘reckless and wanton’), financial and non-financial contributions of each party, the welfare of any children, and the parties’ future needs.
Furthermore, the court also looks at the parties’ future needs when making decisions about asset distribution. This ensures that both parties are provided for in the aftermath of the divorce.
Where there are corporate assets involved in divorce proceedings, it is important to note that in Hong Kong, a company is seen as a separate legal entity from its shareholders, following Salomon v Salomon & Co. Ltd. (1897). Shareholders have no direct claim to company assets, irrespective of whether the company is owned by a single shareholder or multiple shareholders. This strict legal distinction reinforces the principle of corporate independence and protects the assets of the company from being used to settle personal matters, such as divorce settlements.
Disclosure obligations: identifying, tracing and characterizing corporate assets
Identifying, valuing, tracing and characterizing corporate assets is crucial in divorce proceedings in Hong Kong. This may include shares in private or public companies, partnerships, sole proprietorships, or other business entities. Full disclosure of assets is a legal obligation, and failure to disclose assets can have serious legal consequences. Engaging forensic accountants or financial experts may be necessary to accurately access the value of corporate interests. However, during divorce proceedings, the valuation of a business can often be a contentious issues, as each party may have a different perspective on the value of the business. The differences of approach include taking into account a relatively low capital value of the business or a higher value based on the suitable comparable companies reflecting the ‘true picture’ of the business. If valuation cannot be agreed, the accountants may have to be called to give evidence at the hearing. In some cases, parties may appoint a single joint expert whilst also having their own expert, which can increase the costs of the valuation process.
In order to ensure full transparency, parties are required to complete a Financial Statement (also known as “Form E”) during divorce proceedings, disclosing their worldwide assets including interests in private companies. This includes providing the last 2 years of audited / unaudited financial statements and any other documents used to base the valuation of the company. This level of disclosure is essential for a fair and accurate division of assets during divorce proceedings.
In the case of B v B (Matrimonial proceedings: discovery) (1979) 1 All ER 801, the Court addressed the level of disclosure where one party to the proceedings is seen as the alter ego of the company. In such circumstance, additional documents such as company ledgers, profit and loss accounts, company’s bank statements may be required to be disclosed to provide a more comprehensive view of the financial situation.
Hong Kong follows the principle of “matrimonial property”, which encompasses assets acquired during the marriage. However, if one party claims that certain assets are non-matrimonial, such as pre-existing business interests and those interests are not comingled with the marital assets, the burden of proof lies on that spouse seeking to exclude non-marital assets to demonstrate the origin and nature of those assets. Expert advice is often sought to trace the extent to which corporate assets should be considered as ‘non-marital assets’.
Business continuity and Shareholder Agreements
In divorces involving corporate assets, the preservation of the continuity of a business becomes a critical consideration to ensure that disruption to businesses (if any) are kept to minimum. Shareholder agreements can play a key role in addressing the consequences of divorce among shareholders of a company. Such agreements may contain provisions pertaining to share transfers, pre-emption rights or the rights of a divorcing spouse. Seeking independent legal advice when entering into these agreements is crucial to avoid potential disputes and challenges amongst shareholders/investors in an event of an impending divorce.
One suitable provision that can be included in a shareholders agreement is the ability for the shareholders to ‘ring fence’ their shares from being subject to division in matrimonial proceedings. This provision can help shareholders maintain control of their business and prevent any interference that may arise from a divorce.
Practical issues may arise from the existence of pre-emption rights and transfer restrictions in a divorce settlement. For example, when a divorcing spouse holding shares in a private company in Hong Kong is required to offer the shares to other shareholders before transferring them to their spouse, complications may arise if a shareholder decides to exercise their pre-emption right and prevent the transfer. This could result in the divorcing spouse being unable to fulfil the terms of the settlement agreement.
To avoid such conflicts, it is important for members/investors to proactively address these issues by obtaining waivers of their pre-emption rights or removing transfer restrictions altogether. Additionally, companies may consider requiring shareholders to enter into pre/post nuptial agreements to clarify how their interests in the company will be handled in the event of a divorce. By addressing these issues early on and establishing clear guidelines, companies can ensure smoother transitions of shares between spouses and safeguard business interests from being jeopardised in divorce proceedings.
It is important to note that while nuptial agreements are not automatically binding on the courts in Hong Kong, they place a decisive weight when determining the division of assets in divorce proceedings and the terms of the nuptial agreements will often be taken into account if executed properly.
Family Mediation as a potential solution
Family mediation is a process that involves a neutral third party to assist parties navigate the divorce process. It is a facilitative process enabling family mediator to work with the parties to reach an amicable resolution. Through open dialogue and facilitated negotiations, families can resolve their difference on finances, children and how corporate assets can be divided potentially avoiding disruptions to businesses and ensuring continuity.
Final considerations
Divorce proceedings involving corporate assets require a thorough understanding of elements from both family and corporate law in Hong Kong. Navigating this complex landscape necessitates careful planning, expert and legal advice, and a focus on preserving business continuity while ensuring a fair division of assets. By carefully planning and approaching the process with diligence, parties can minimise the impact of the divorce on their business interests and overall family well-being. It is therefore essential to have checks and balances in place to ensure a fair division of assets while preserving business continuity.
The facilitative process of family mediation plays a vital role in helping parties reach an amicable resolution and navigate through complex issues, ultimately promoting a fair and mutually beneficial outcome for all involved.
The article was originally published on Hong Kong Lawyer
