Protecting the Family Business During Divorce

Divorce is never easy, and for high-net-worth individuals, the stakes are even higher when a family business is involved. Family-owned businesses are usually held in high sentimental value, thereby increasing pressure on business owners to “keep it in the family,” which can be a difficult and strenuous process throughout divorce proceedings. When a family business is part of the equation, additional property and asset division complexities arise. 

This blog explores key strategies for protecting your family business during divorce while navigating Alberta’s legal landscape.

Understanding How Alberta Law Treats Family Businesses in Divorce

Under Alberta’s Family Property Act, matrimonial property includes all assets acquired by either spouse during the marriage, subject to certain exceptions. A family business—whether incorporated or not—is typically considered matrimonial property if it was established or significantly grown during the marriage. This means it could be subject to division upon divorce.

Relevant Alberta Business Legislation

• The Business Corporations Act (Alberta) governs the formation, operation, and dissolution of corporations in Alberta and provides guidance on matters such as shareholder rights, corporate governance, and the transfer of shares.
• The Partnerships Act (Alberta): This legislation governs the rights and obligations of partners in a partnership. It provides a framework for the dissolution of partnerships and the distribution of partnership assets.

Exemptions

While matrimonial property encompasses assets acquired during the marriage, Alberta law provides certain exemptions. Property acquired before the marriage is received as an inheritance or given as a gift to one spouse may be exempt from division. However, the situation becomes more nuanced when the value of an exempt property increases during the marriage. For instance, if one spouse owned a business before the marriage and its value grew significantly, that increase might be subject to division. Similarly, if the business started with an exempt gift or inheritance but expanded through the efforts of one or both spouses, the resulting value increase may no longer be protected under the exemption.

Valuation

Valuing a family business is one of the most critical and complex steps in dividing matrimonial property. The process often involves determining the business’s fair market value during separation. Valuation methods may vary, including income-based, asset-based, or market-based approaches, depending on the business’s nature and operations. Since valuations can significantly impact property divisions, engaging experienced financial professionals, such as business valuators or accountants, is essential. These experts can ensure the valuation is accurate and fair, reducing the likelihood of disputes. Moreover, their expertise is crucial when addressing issues like retained earnings, goodwill, or the business’s future earning potential.

Contribution

Even if one spouse did not actively participate in the business’s day-to-day operations, their contributions might still entitle them to a share of its value. Alberta law recognizes both direct and indirect contributions to matrimonial property. For example, a spouse who supported the household cared for children, or provided emotional or logistical support, enabling the other spouse to focus on running or expanding the business, may have a valid claim. These indirect efforts are considered as significant as direct involvement, such as working in or investing in the business. When determining division, the courts consider the full scope of contributions made by each spouse during the marriage.

Drafting a Strong Domestic Contract

A domestic contract, such as a marriage or cohabitation agreement, is one of the most effective ways to protect a family business. A well-crafted domestic contract can be instrumental in designating the family business—or its growth—as separate property, thereby helping minimize the risk of being included in the property division during divorce proceedings. By proactively addressing property division, such agreements minimize potential disputes and legal uncertainties that may arise later.

Enforceability Criteria

For a domestic contract to be enforceable, it must meet several legal criteria. Both parties must voluntarily enter the agreement, with each spouse providing full financial disclosure. Independent legal counsel for each party is also critical to ensure fairness and safeguard against future court challenges. In Alberta, courts have upheld domestic contracts, demonstrating clear and informed consent and equitable treatment of both parties.

Valuation of the Business

Domestic contracts can also include specific terms related to the valuation of the business in the event of a divorce, providing a pre-agreed framework for asset division. This proactive planning saves time and money and reduces the emotional toll of litigating business-related disputes. For high-net-worth individuals, a domestic contract is a powerful tool for protecting complex financial interests, particularly when a family business is a significant part of the marital estate.

The valuation method, whether income-based, asset-based, or market-based, can significantly impact the outcome. Hiring a neutral, court-approved valuation expert can help ensure fairness and reduce disputes, especially in high-net-worth divorces with significant assets.

Structuring the Business to Limit Vulnerability

Certain corporate structures can make it more challenging for a family business to be divided in a divorce. For instance, placing the business in a holding company can separate ownership from operational control, which may help limit the exposure of the business during asset division. Similarly, shareholder agreements can restrict the transfer of shares during a divorce, often requiring shareholder or board approval before shares are transferred to a spouse. Trusts can also effectively protect business assets by removing them from direct ownership, though such arrangements must be carefully structured to avoid allegations of fraud or unfairness.

Negotiating a Buyout or Settlement

If both spouses have a claim to the business, a buyout can be a practical solution. This allows one spouse to retain business ownership while compensating the other for their share. Negotiating a buyout involves agreeing on a valuation, considering payment options (such as lump sums or installments), and ensuring financing does not jeopardize the business’s operations. Clear legal documentation of the buyout terms is essential to avoid future disputes. This includes specifying payment schedules, interest (if applicable), and any conditions attached to the transaction.

For high-net-worth individuals, a buyout also offers the advantage of maintaining control over the business without ongoing entanglement with the former spouse.

Considerations for Children and the Family Business

When children are involved in a divorce involving a family business, the complexities increase significantly. Child-related considerations must be carefully integrated into all divorce strategies to ensure the best interests of the children are paramount.

Estate Planning

If the family business constitutes a significant part of the family’s wealth, careful estate planning is crucial to secure the child’s inheritance. This process might involve creating trusts or other legal mechanisms to protect the child’s financial future. Trusts, for example, allow parents to manage the business’s wealth for their children’s benefit without granting them immediate control. Such measures ensure the family’s hard-earned legacy is safeguarded and responsibly managed for the child’s future needs.

Succession Planning

A divorce should not jeopardize the child’s future inheritance from the family business. Creating a well-defined succession plan is essential for ensuring that the ownership transition occurs smoothly, regardless of the divorce. This might include identifying roles and responsibilities for the child within the business, setting conditions for inheritance, and developing a roadmap for the transfer of shares or assets. An effective succession plan fosters stability and continuity, allowing the business to thrive while preserving the child’s long-term financial security.

Protecting the Child’s Interests

To ensure the child’s inheritance and overall interests are safeguarded, involving experienced legal and financial professionals is critical. These experts can guide parents in balancing the needs of their children with the broader goals of property division and financial settlement. Strategies may include appointing trustees or legal guardians for the child’s financial affairs, developing agreements prioritizing the child’s future well-being, and establishing safeguards to protect the business’s value during the divorce process. Ultimately, these measures help secure the child’s rights while minimizing disruptions to their future prospects.

Calgary Family Lawyers Assisting Business Owners with High-Value Asset Division 

Divorces involving family businesses require careful planning and strategic decision-making. By understanding Alberta’s legal framework and implementing the strategies outlined above, high-net-worth individuals can protect their business interests and achieve a fair resolution. 

Our Calgary family law lawyers at Mincher Koeman are here to guide you through property division, spousal support, and divorce. Contact us today to schedule a consultation and protect your assets. To book a consultation, contact us online or by phone at 403-910-3000.