Divorce and business owners: what you need to know

Must the value of the business be divided or settled as a result of the divorce?

A business can often make a divorce more complicated because it must be determined whether the value of the (shares in the) business must or must not be divided or settled.

Which marital property regime applies?

The first question to answer in this context is which marital property regime applies. This depends on whether you are married with or without a prenuptial agreement.

Married with prenuptial agreements

Many entrepreneurs are married under a prenuptial agreement. The content of the prenuptial agreement determines whether the value of the business must be divided between the parties.

Although the specifics of prenuptial agreements may vary, the most common types are:
(i) Cold exclusion,
(ii) Periodic settlement clause, and
(iii) Final settlement clause.

Ad (i): Cold exclusion

Under cold exclusion, all property remains private, except for property in joint names. In such cases, the business is excluded from the settlement in the event of a divorce.

The principle of cold exclusion is that assets built up before or during the marriage remain the property of the spouse who acquired them.
This also applies to growth in assets due to saved income, which remains with the spouse who earned or obtained it.

Ad (ii): Periodic settlement clause

A periodic settlement clause is common in prenuptial agreements. The parties agree to exclude community of property but stipulate that income not spent on household expenses (so-called surplus income) must be calculated annually and divided equally.

What exactly is meant by “income” depends on the prenuptial agreement. Different definitions can be chosen:

• A broad income definition that includes business profits,
• Or a more limited definition that, for example, only includes earned wages.

In practice, periodic settlement clauses are often not carried out during the marriage. The law dictates that in such cases, settlement must still occur, with the presumption that assets present at the time of the divorce were formed from income that should have been settled—unless fairness dictates otherwise, considering the nature and scope of the settlement obligation.

In concrete terms, this means that during a divorce, it must first be determined what income/assets were used to establish the business. If the business was started with income/assets that fall under the definition of income in the prenuptial agreement, there is a real chance that the value of (the shares in) the business must be settled.

The above primarily addresses whether the entire value of the business must be settled. A separate question is whether profits retained in the business must also be settled. If the prenuptial agreement includes a definition of income that includes retained profits, the law requires those profits to be settled as well.

Final settlement clause

Under a final settlement clause, the parties settle as though they were married in community of property. Legally, this creates a “pseudo-community.” The agreement can exclude certain assets from the settlement, such as pre-marital property, inheritances, or gifts, or (the shares in) a business. If the business is not explicitly excluded, its value must be settled under the agreement.

Full community of property

Are you married under Dutch law before January 1, 2018, without a prenuptial agreement? The Dutch Civil Code then states that you are married in full community of property.

Under the law, the community of property includes all assets and debts of the parties. This includes (the shares in) the business. During the division of the marital property, the value of the (shares in the) business must therefore be assessed and divided 50/50 between the parties.

In the case of a sole proprietorship, it is important to realize that this business form does not have separate legal assets. This means all assets and liabilities of the sole proprietorship are included in the community of property. All assets and liabilities must be valued separately and allocated to the spouse continuing the business after the divorce.

A general partnership (vof) and a private limited company (bv) are legal entities with separate assets. This means the assets and liabilities themselves are not included in the community of property. However, the spouse’s share in the vof or private limited company is included. The value of this share must be determined.

Limited community of property

Are you married under Dutch law on or after January 1, 2018, without a prenuptial agreement? The Dutch Civil Code then states that you are married in a limited community of property.

Under a limited community of property, the general rule is that the following are included:
(i) Assets acquired by either or both spouses from the start of the community (i.e., the date of the marriage), and
(ii) Assets that already jointly belonged to the spouses before the community began.

If the business was established after the date of the marriage, it falls into the limited community and its value must be divided. The only exception is if the business (or shares in the business) was established or purchased with private assets. In that case, there is a substitution of assets, and the business may remain outside the limited community. In this case, the value of the (shares in the) business does not need to be divided.

Corporate law settlement

The above concerns whether the value of a business must be divided or settled during the divorce. In practice, it often happens that spouses are also connected in business, for example, as partners in a general partnership, as members of a partnership, or as shareholders in the same private limited company.

A divorce often means the spouses can no longer work together, which also leads to the termination of their corporate relationship. In such cases, it is important to also address the corporate law settlement of the general partnership, partnership, or private limited company. Often, agreements regarding this are laid out in a partnership agreement, partnership deed, or shareholders’ agreement. It is crucial to review these agreements carefully during the divorce and ensure this aspect is not overlooked.

Finally

If you are an entrepreneur or the spouse of an entrepreneur going through a divorce, it is essential to work with your lawyer to create a solid plan of action and determine how the business should be treated in the divorce. The above is intended as a guide to provide an idea of the key principles. For more advice, we recommend scheduling an appointment.