Insights

Ningbo divorce equity division does not affect the company's operations

Ningbo Author：LuXu WANG

When a company’s shareholder divorces, the spouse’s request to divide the equity may lead to a dilution of the company’s control, stricter bank credit reviews, a loss of trust among other shareholders, and even disruptions in upstream and downstream business relationships. How to protect the spouse's property rights and interests without affecting the company's operations? Conclusion First of all: Yes, but the path is exquisite-give priority to discount compensation, so that the equity structure remains unchanged; if it is really necessary to distribute the equity to the spouse, written notice and pre-emption procedures must be performed in accordance with the law; the company's articles of association, equity structure and family property agreements can be made clear in advance. This paper combines the Company Law (hereinafter referred to as the New Company Law), which was revised in 2023 and came into effect on July 1, 2024, with the judicial interpretation of the Marriage and Family Code of the Civil Code, to sort out the path and practical points of the division of divorce equity.

1. Prefer discounted compensation over direct division of equity.

If the spouse only seeks monetary compensation, the shareholder shall pay the spouse the cash equivalent of the equity value, while the company’s equity structure remains unchanged. This is the most common and business-friendly solution in practice. Discount compensation has the least impact on the company’s operations, which is specifically manifested at four levels:

  1. Stable Control: The voting rights structure remains unchanged, the shareholders’ meeting decision-making mechanism is unaffected by marital disputes, and other shareholders have clear expectations regarding cooperation.
  2. Credit and financing are unaffected: Banks’ pre-loan reviews focus on the stability of the equity structure and changes in the actual controller; maintaining an unchanged equity structure can help avoid triggering arrangements such as early loan repayment or the re-signing of guarantees due to shareholder changes.
  3. Preservation of Personal Association: A limited liability company is characterized by its personal association; by excluding “passive shareholders,” it can avoid the discomfort that arises when existing shareholders are required to operate the business alongside new ones, thereby reducing internal friction.
  4. Tax burden is manageable: With the equity structure unchanged, there is no tax liability associated with equity transfers; the arrangement only involves a property settlement in which the shareholder pays compensation to the spouse, making the tax treatment relatively straightforward.

There are three ways to determine the discount in practice: both parties negotiate to determine; entrust a professional evaluation agency to make a comprehensive evaluation according to the company's net assets, profitability and industry status; if the negotiation fails, the court will decide after entrusting judicial evaluation in the lawsuit. The valuation of equity value should determine a uniform base date to avoid inconsistencies in value due to fluctuations in the company's operations.

2. If it is indeed necessary to directly divide the equity: the procedure for other shareholders' right of first refusal must be followed.

If the spouse insists on becoming a shareholder directly, the shareholder who holds the shares cannot "transfer" the shares to the spouse on his or her own, but must follow the procedures stipulated in the Company Law:

  1. written notice: when shareholders transfer their shares to other shareholders, they should notify other shareholders in writing about the quantity, price, payment method and time limit of the share transfer (article 84 of the new company law).
  2. preemptive right under the same conditions: other shareholders have preemptive right under the same conditions; if the shareholders do not reply within 30 days from the date of receiving the written notice, they shall be deemed to have given up the preemptive right. If two or more shareholders claim to exercise the right of first refusal, they shall negotiate to determine their respective purchase ratios; if they fail to negotiate, they shall be exercised in accordance with their respective proportions of capital contribution at the time of transfer.
  3. Articles of association are preferred: if the articles of association have other provisions on equity transfer, they shall be followed.
  4. Connect with the rules of marriage and family affairs: Article 73 of the (I) of Interpretation of Marriage and Family stipulates that in divorce cases involving the division of the joint property of husband and wife, if one party's capital contribution in a limited liability company and the other party is not a shareholder of the company, other shareholders shall be consulted to ensure the preemptive right; if other shareholders do not agree to transfer and do not purchase, they shall be deemed to agree to transfer. It should be noted that this article is aimed at the procedure of "more than half of other shareholders agree" in the original company law. The new company law has canceled the pre-requirement of more than half of the consent and changed it to the rules of written notice and preemptive right. In practice, the procedure of Article 84 of the new company law should be taken as the basic framework, and the spirit of judicial interpretation to protect the preemptive right and respect the wishes of other shareholders should be implemented.

A common procedural oversight is “focusing solely on the emotional aspect while neglecting the formalities”—spouses agree internally that equity interests will be transferred to the spouse, yet fail to notify the other shareholders or to complete the required registration of the change. Such an agreement is effective only between the spouses and cannot be enforced against the company or other shareholders; nor can the spouse thereby acquire shareholder status.

3. The company's articles of association may make arrangements in advance.

The company’s articles of association may include special provisions regarding the transfer of equity interests, thereby incorporating the risks associated with marital dissolution into the company’s governance framework in advance:

  1. It is agreed that the shares can only be transferred internally or repurchased by the company upon divorce.: Other shareholders or the company shall acquire the equity at the agreed price or the appraised value, and the equity shall remain within the company.
  2. The agreement stipulates that the spouse may only receive property income but does not have voting rights.: Balance the spouses' interests and corporate control with the arrangement of "separation of income rights and voting rights", but the arrangement must be expressly agreed in the articles of association or shareholder agreement and approved by the spouse to avoid being deemed to damage the spouse's property rights.
  3. The determination mechanism of the agreed transfer price: it is agreed in advance that the appraised value shall prevail or the net assets shall be taken as the base, so as to reduce the valuation disputes at the time of divorce.

However, charter restrictions are subject to certain limits: they may not substantially deprive shareholders of their right to transfer equity interests; otherwise, such provisions may be deemed invalid. Furthermore, the charter may not be used to circumvent legal protections afforded to a spouse’s legitimate property rights. Provisions of the company’s articles of association should be incorporated by unanimous agreement of all shareholders at the time of the company’s establishment or when the marital relationship has stabilized. Amending the articles on an ad hoc basis in response to a divorce may be deemed a collusive act intended to harm the interests of the spouse and thus rendered invalid. In addition, a separate shareholder agreement may be signed between shareholders, stipulating a marriage trigger clause (e. g., in the event of a divorce, the spouse of one party may not become a shareholder and the other shareholders are given priority), which will be implemented at the "shareholder level".

The arrangement of articles of association and shareholder agreement should also be connected with the enterprise equity incentive and external financing structure: for companies with employee stock ownership platform or option pool, the different disposition rules of incentive equity and founder's self-owned equity should be clarified before divorce division, so as to avoid the chain reaction of incentive object adjustment and repurchase obligation triggered by marriage change; the company in financing or listing counseling stage, anti-dilution, equity lock-up, joint sale, forced sale and other provisions in the investment agreement often restrict the founder's transfer of equity, divorce and division plan must obtain the investor's prior written approval, otherwise it may constitute a default. More and more enterprises have incorporated the "shareholder marriage clause" into the necessary content of financing negotiations-in the three documents of articles of association, shareholder agreement and investment agreement to simultaneously agree on the internal transfer, repurchase and pricing mechanism in the case of marriage, in order to form a complete risk closed loop. At the same time, if the company has an employee shareholding association or trade union holding arrangement, the divorce division also involves the restoration of the holding relationship and the procedure of revealing the name, the procedure is more complex, should be sorted out before the division.

4. Family Trusts and Shareholding Platforms: A Longer Term Structure Arrangement

for high net worth business owners, discount compensation and articles of association belong to "after-the-fact shock reduction", while family trust and stock holding platform are "pre-isolation":

  1. equity trust: the equity is put into the family trust, which is held by the trustee and managed according to the trust documents. the benefit arrangement is independent of the change of the trustor's marital status, and the marriage change generally does not directly lead to the division of the equity.
  2. Limited partnership shareholding platform: The founder as a general partner (GP) controls the platform and arranges the shares of family members with a limited partner (LP). The shares of the company are held by the platform. Even if the LP shares are divided in the divorce, the voting rights and control rights of the founder will not be directly shaken.
  3. Spousal Property Agreement: A written agreement entered into before or during marriage that specifies the ownership and treatment of any appreciation in company equity (Civil Code, Article 1065) serves as the most cost-effective preventive measure and should be used in conjunction with corporate structure design.

Reminder: This type of plan should be put in place before marriage or while the marital relationship is still strong. In the event of a divorce, the establishment of a trust or the transfer of equity may be deemed to be a transfer of the common property of the husband and wife, and may even be ruled invalid in accordance with Article 10

92of the Civil Code.

5. Equity value assessment: methods, valuation date, and common approaches

Regardless of discount compensation or equity consideration, valuation is central. Practical points:

  1. Method: The asset base method (net assets method) looks at the book and revaluation value, the income method looks at the future profitability discount, and the market method refers to similar transactions. Manufacturing enterprises and light-asset technology companies are best suited to different primary valuation methods; relying on a single method can lead to distortions, so it is advisable to cross-validate.
  2. base date: generally, the date of divorce lawsuit or the time point determined by both parties through negotiation is the base date of evaluation. in case of major business changes of the company during the evaluation period, it should be adjusted dynamically.
  3. Common Misconceptions: The registered capital or the subscribed capital contribution amount cannot be used as the equity value; the impact of unpaid-up capital, corporate liabilities, and external guarantees on the net equity value must not be overlooked; the value corresponding to the shareholding ratio held by one spouse must be adjusted by deducting the amount attributable to their outstanding unpaid-up capital obligation.

6. case verification and deduction

Case (case closed through mediation, sorted out according to similar rules): The husband holds 70% of the equity in a manufacturing company, and the wife has requested a division of that equity in the divorce proceedings. Following an appraisal, the company’s equity is valued at RMB 5 million, of which the female party is entitled to 35%, corresponding to RMB 1.75 million. Ultimately, the parties reached a settlement under which the man agreed to pay the woman a lump-sum compensation of RMB 1.75 million, while the equity structure remained unchanged and the company’s operations were unaffected. Discount compensation is the most efficient option when there is little disagreement between the parties.

Case (malicious transfer was denied): In another case, the man transferred the equity to his relatives at a low price in an attempt to avoid division. The court determined that the transfer constituted an intentional diversion of marital property, ruled the transfer invalid, and ordered the division of assets based on the actual value of the equity interests. Marital surprise low-cost transfer of equity, it is difficult to counter the spouse's revocation and division claims.

Deduction case (example, fictitious): The woman asked to directly become a shareholder holding 30% of the shares. After the man informed the other two shareholders in writing of the transfer conditions, the two shareholders said that they would buy all the shares to be transferred according to the same conditions. The woman's request for shares could not be realized and finally got the discount. This example illustrates that the right of first refusal is a “rigid procedural requirement,” and a spouse does not automatically become a shareholder.

Common 7. Mistakes

Misconception 1: Dividing equity in a divorce does not require the consent of other shareholders.Correct answer: Although the new Company Law has abolished the prerequisite requirement of “approval by more than half of the other shareholders,” the right of first refusal still exists. Shareholders intending to transfer their shares must notify the other shareholders in writing of the terms of the transfer. Under otherwise identical conditions, the other shareholders shall have a right of first refusal. Any transfer made without such notice may be rescinded or may result in the inability to register the change of ownership.

Misunderstanding 2: The bylaws can completely prohibit spouses from acquiring equity. positive solution: the articles of association can make special provisions on the transfer of shares, but the restrictions must be reasonable, and the shareholders cannot be deprived of the right to transfer shares substantially, otherwise they may be deemed invalid; if the temporary amendment is used to avoid the division of spouses, it may also constitute malicious collusion.

Misunderstanding 3: Transferring equity to relatives can keep the company.Correct answer: During marriage, transferring equity interests to relatives at a low price or gratuitously may be deemed as a transfer of marital joint property, entitling the spouse to request the transfer be revoked or to claim a larger share of the property; creditors may also assert that such transfers are made with the intent to evade debts and seek a declaration of their invalidity.

Misconception Four: Equity value equals registered capital. positive solution: the equity value is usually much higher or lower than the registered capital, which should be comprehensively evaluated in combination with the company's net assets, profitability, industry status, land and plant appreciation, etc. Unpaid capital contributions and company liabilities must be deducted.

8. Frequently Asked Questions

In a divorce, if equity is divided, can the spouse directly become a shareholder?

cannot be of course. If the transfer of shares by the non-shareholder's spouse is a transfer to a person other than the shareholder, the shareholder shall notify the other shareholders in writing of the number, price, payment method and period of the transfer, and the other shareholders shall have the right of first refusal under the same conditions; if the other shareholders exercise the right of first refusal, the spouse shall only obtain a discount. Where the articles of association provide otherwise, such provisions shall prevail.

Does the compensation paid at a discount constitute a redistribution of marital joint property, and is it subject to taxation?

Discount compensation is a form of the division of the joint property of husband and wife, which does not change the ownership of equity and does not have the tax obligation of equity transfer; the compensation obtained by the spouse belongs to the income of property division, and generally does not generate personal income tax. If the transfer is conducted via a direct equity transfer, the transferor may be subject to personal income tax and stamp duty; it is advisable to confirm the applicable tax treatment with the tax authorities in advance.

What if the other shareholders of the company do not agree to the spouse's shareholding?

Other shareholders shall have the right of first refusal to purchase the equity interest to be transferred under the same conditions; if they neither purchase nor respond, they shall be deemed to have consented to the transfer, and the spouse may acquire the equity interest in accordance with the law and complete the registration of the change. The core of the convergence and application of Article 73 of the Interpretation (I) on Marriage and Family and Article 84 of the New Company Law is to protect other shareholders' preemptive rights and respect their true wishes.

At the time of divorce, the equity has not been paid in, how to divide it?

Unpaid capital contribution does not affect the division of the equity as property, but the spouse or the transferee shareholder of the equity will inherit the capital contribution obligation, and the unpaid part should be deducted when evaluating the valuation, and it is clear in the agreement who will continue to perform the capital contribution obligation to avoid being recovered by the company or creditors in the future.

9. Practical Insights from a Lawyer

When a company’s shareholders get divorced, the biggest concern is not losing out on financial assets, but rather the disruption it causes to the company: dilution of control, tighter credit lines, and a loss of trust among other shareholders. From the experience of handling the case, the first choice to stabilize the operation is to compensate the equity at a discount, rather than directly divide the equity-the holding party continues to hold the company's equity and pays compensation to the spouse according to the assessed value. This approach preserves both the company’s unity and management control while enabling the spouse to receive a cash settlement, ensuring that the core interests of both parties are met. The first step is not to rush into discussing the profit-sharing ratio; instead, you should first ascertain the company’s legal structure, its shareholding composition, and the attitudes of the other shareholders before determining whether a discounted compensation arrangement is feasible.

If it is really necessary to divide the shares directly, the procedure of preemptive right of other shareholders cannot be bypassed, and this step is easy to be overturned. In operation, other shareholders should be notified in accordance with the procedures stipulated in the Company Law and the Articles of Association of the Company, and the certificates of notification and reply should be retained; at the same time, the equity value assessment should be made solid-the choice of assessment method, reference date and caliber directly determines the amount of compensation, and the differences between the two sides are basically stuck here. It is suggested that the base date should be locked and financial information should be prepared before prosecution or negotiation, so as to avoid being led by the other party. If the appraisal caliber is controversial, several sets of plans can be listed for the court to choose, instead of only recognizing one number given by the other party.

A more advanced layout is to make arrangements in advance in the articles of association or pre-marital and intra-marital agreements, and to write clearly the way to deal with the equity in the event of divorce, so as not to be passive when things come to an end. Negotiations can take advantage of the other side's most concerned points: concerned about the marriage change is known to the outside world, worried about the company's impact on the party, often willing to use discount compensation in exchange for a "decent settlement. The cost of the two options of "cash" and "equity" is calculated again, so that the negotiation will not be overpriced or sold at a low price.

When the divorce of enterprise shareholders involves the division of shares, it is suggested to grasp the "three priorities": give priority to discount compensation and maintain the stability of the company's shareholding structure to the maximum extent; If it is really necessary to divide the shares, priority shall be given to the procedures of written notice and priority purchase according to law. Business owners give priority to completing the articles of association, shareholder agreement and equity structure design when the marriage relationship is stable, so as to resolve the risk of marriage change. For one spouse, the advantages and disadvantages of "being a shareholder" and "taking compensation" should be viewed rationally-in a non-listed company, becoming a shareholder is not necessarily more advantageous than obtaining a full discount, but also to bear the obligation of capital contribution and operational risks. Involving divorce equity division disputes, it is recommended to make a targeted analysis of the equity structure, evaluation method and tax treatment of the case.