Insights

Can Ningbo Company's equity be divided in the event of divorce?

Ningbo Author：LuXu WANG

The spouse has the equity of a company, can it be divided during divorce? Equity is not a bank deposit, it involves the company's personality and other shareholders' interests, and the division method is different from real estate and deposit.

Why is the division of 1. equity special?

The limited company has the attribute of human union, and the shareholders pay attention to mutual trust. If the shares are awarded directly to a non-shareholder party in the event of divorce, it is tantamount to forcing a new shareholder into the company, which may shake the stability of the company, so the law has set special rules for the division of shares.

Equity and property value should be seen separately.

Divorce divides the property rights and interests corresponding to equity (e. g. corresponding net assets, dividends, value added), rather than the transfer of shareholder status as a matter of course. The transfer of identity is also subject to corporate law and bylaws.

2. preemptive rights of other shareholders

if the equity of a limited company under the name of one spouse wants to be transferred to the other party, the other shareholders have the right of first refusal under the same conditions. In practice, it is often necessary to consult other shareholders, and a majority of them agree and waive the priority purchase before a non-shareholder party may become a shareholder.

Discount compensation in case of disagreement

if the other shareholders do not agree to the transfer and exercise the right of first refusal, the non-shareholder party usually cannot acquire the equity directly, but the party acquiring the equity will compensate the other party at a discount to the value of the equity, and the property interest is still divided.

3. three common processing paths

first, both parties agree that the holding party will continue to hold shares and compensate the other party; second, other shareholders agree and give up the priority purchase, and non-shareholders become shareholders; third, the price will be divided after auction or price. The path choice depends on the company's situation and the will of the parties.

1. Assessed value is the basis

whether at a discount or at an auction, the value of the equity must be determined first, often with the help of an audit assessment. Concealment of the company's earnings and misrepresentation of liabilities can directly affect the fairness of the division and may also bear adverse consequences.

2. The order of application of the three paths

the first choice is negotiated price compensation: the equity belongs to the holding party, which pays half of the corresponding equity to the other party according to the appraised value, with the simplest operation and the least interference to the company. The second is the transfer of partial shares: the consent of more than half of the other shareholders is required and the right of first refusal is waived. The last is the auction realization, because it takes a long time, the discount is large, unless the two sides of the confrontation is fierce and the company's assets are clear, less used in practice.

The risk of 4. a surrogation

if the equity is held by another person and the registered nominee is not a spouse, the division must first prove the actual capital contribution and the holding relationship. Without a proxy agreement and an incomplete chain of capital contributions, it would be difficult to claim equity as common property.

The power to hold shares on behalf of the company cannot be divided.

Although there is no registration in the name of the spouse, there is a fact of holding the equity, still belongs to the joint property of the husband and wife, but the proof is difficult. It is necessary to come up with a chain of holding agreements, capital contribution vouchers, dividend transfer records, and communication to participate in business decisions. It is difficult for the court to break through the publicity effect of industrial and commercial registration only by hearing or unilateral statement. According to the Yinzhou Court's White Paper on the Trial of Marriage and Family Cases (2019-2021), WeChat and other electronic evidence has many defects in proof and is difficult to accept. If the proxy relationship is only supported by WeChat chat records, it also needs to form a complete evidence chain with transfer vouchers and dividend records.

5. the valuation caliber is different, the amount of compensation may be twice as bad.

The most substantial point of contention in the division of shares is often not whether it can be divided, but at what price. The three common calibers are: based on registered capital or paid-in capital contributions, based on the company's share of net assets, and fair value based on the income approach. It is not uncommon for the same company to calculate the results with different calibres, especially for companies with light assets but stable profits.

A party that advocates a valuation under the net asset or income approach needs to obtain financial information first. A shareholder's spouse may advance by requiring the shareholder to submit a balance sheet, profit statement, or apply to the court in a lawsuit to obtain access to the company and entrust a professional body to evaluate it. If the holding party refuses to cooperate and deliberately conceals the operating data, the court may make an unfavorable determination at the time of the division, and the margin of the concealment transfer party's underscore is usually 20% to 40%.

6. case proof

in practice, 40% of the shares of the limited liability company under the husband's name were claimed to be divided at the time of divorce, and with the consent of more than half of the other shareholders and all waived the right of first refusal in writing, the court ordered that half of the shares, that is, 20% of the shares, should be acquired by the wife on a pro rata basis and registered for change, and the company's personality was not materially affected.

In practice, other shareholders explicitly do not agree with the non-shareholder spouse's right of preemption and exercise the right of preemption in accordance with the law. The court ordered that the equity still belongs to the husband, and he shall pay the wife a discount compensation equivalent to half of the corresponding equity in the marriage according to the equity value determined by the evaluation agency, and agree to pay it in three phases within 12 months, and add interest on the unpaid amount if it is overdue.

7. Risk Alert

  • the mistake is to think that equity can be divided half-and-half as well as deposits.
  • Ignoring the preemptive rights of other shareholders led to the failure of the scheme.
  • The use of false representation agreements to compete for production was found to be invalid.
  • Talk about compensation without evaluation, value base distortion.
  • Conceal the company's revenue, after the split passive and responsible.

8. FAQ

can a spouse's equity divorce be split in half?

Can't split it, of course. The division of shares is subject to the limitation of the company law and often requires the consent of other shareholders or compensation at a discount.

What if other shareholders don't agree with me?

They can exercise the right of first refusal, and you generally cannot become a shareholder directly, but you can get a discount on the value of the equity.

Is the equity held on behalf of others?

The relationship between the actual contribution and the nominee needs to be proved. The nominee agreement and the chain of contributions are incomplete and it would be difficult to claim common property.

How is the equity value determined?

Net assets and equity are usually determined by an audit assessment, which is then compensated or auctioned.

Who will probably bear the company's equity assessment fee?

Generally by the party applying for assessment first advance payment, and finally by the court according to the result of the division and the fault of both parties in the judgment to determine the way of sharing, usually according to the proportion of the share of the interest or by the two parties to bear half. If the shareholder refuses to provide financial information without good reason and the appraisal is blocked, the shareholder may be ordered to bear the full appraisal costs.

What if the other party transfers the company's profits during the lawsuit?

You can apply for property preservation and request the court to obtain the company's books. If it is verified that there is an act of concealing or transferring common property, the party may be divided less in the division, and the range of less points in similar cases is more than 20% to 40%. If the circumstances are serious, another lawsuit may be filed after divorce to request another division.

Practical Experience of 9. Lawyers

equity is not a deposit, divorce can not simply one and a half. Limited companies talk about human cooperation and shareholders should trust each other. Therefore, the law has set special rules for the division of shares: the property rights and interests corresponding to the shares, such as the corresponding net assets, dividends and value added, are first divided in divorce. As for whether the shareholder's identity can be transferred together, it is also bound by the company law and the articles of association. Usually, more than half of the other shareholders agree and give up the preemptive right before the non-shareholder can become a shareholder. To make this difference clear, the negotiation will not ask for half of the shares at the first opening.

Since it is often unrealistic to take equity directly, the most common and stable in practice is that the equity belongs to the holding party and is compensated at a discount to the other party according to the appraised value. This brings the focus to the valuation, the value calculated by different calibers may be much worse, so with the help of audit assessment, get the company's accounts, net assets, dividend records and operating conditions as the basis. If the equity is held by someone else and the registration cannot be found under the spouse's name, it is necessary to prove the actual capital contribution and holding relationship first. The holding agreement, capital contribution voucher, dividend transfer and transaction records of participating in business decision-making should form a chain. It is difficult to break through the publicity effect of registration only by hearing.

There is a general order in the path selection: the first choice is to negotiate price compensation, the operation is the simplest, the least interference to the company; The second is the partial transfer of equity with the consent of other shareholders. The last is the auction to realize the cash, because it takes a long time and the discount is large. Unless the two sides confront each other fiercely and the company's assets are clear, it is generally not easy to go. I would also like to remind you not to confuse the company's assets with the property of the husband and wife. The houses, cars and equipment under the company's name belong to the company and are not objects that the husband and wife can directly divide. It's easier to talk about a company's equity, family input, and compensation package together than to focus on a percentage alone.