With Kim Kardashian and Kayne West's impending divorce storming the media, the latest news is Kardashian’s closure of the website for her make-up brand, KKW. Speculation is mounting over whether a rebrand will involve dropping the 'W' from the company name as the celebrity couple finalise their divorce.
Kardashian is the sole owner of the brand, so her rebranding of the business is completely disassociated from her ex-husband. But what happens when both parties have shares in or co-own the business?
It is a common misconception that the courts disregard business assets
When Bill and Melinda Gates announced their plan to divorce in May, the couple put on a united front, confirming that they would continue to work together to run the Bill & Melinda Gates Foundation. And owners of the Italian fashion brand Dolce and Gabbana – Domenico Dolce and Stefano Gabbana – continued to work together following their separation in 2005.
Post-divorce relations are not always so harmonious. In my experience, it is uncommon for both parties to want to retain a business relationship post-separation, often preferring to opt for a clean break and severing all financial ties. This allows both parties to strive for complete independence from the other if this is achievable and affordable. However, while the court has a duty to consider a clean break, that does not mean that there is a presumption in favour of one.
How should businesses be looked at within a divorce? The overall aim of financial proceedings is to achieve a fair outcome, so the work starts with the business being treated as an asset; it is a common misconception that the courts disregard business assets. And the asset, of course, needs to go through an often-complex valuation process.
A sale of the business is often the last resort, and every opportunity will be given to avoid it
Then there’s the issue that the business is also a financial resource available to the divorcees, so it is important to look at how much money can be drawn out to fund a financial settlement on divorce, and the future income that could be produced.
This might be particularly important if maintenance is being considered. In most circumstances, the business owner will usually be left with the business, and the other party will be compensated with a larger share of the other assets or maintenance payments.
While the courts will try to avoid selling a business, a sale may be required if there is no other way to achieve a fair outcome. It is, however, very rare for the courts to support this course of action. In circumstances where a sale is ordered, it is often the last resort, and every opportunity will be given to avoid this outcome.
As with the 2019 divorce of Amazon founder Jeff Bezos (see panel), the court can order the transfer of shares in a limited company from one party to the other. This is usually when a business is co-owned, and only one of the parties will continue to run it in the future.
Where third parties own shares in the business, issues may arise as to whether their agreement is required for a transfer of the shares to take place. In these circumstances, the articles of association will need to be checked to see what the available options are. However, there have been cases where, despite the articles of association stating that a transfer of shares could be resisted, it did not prevent the court from making an order.
Put it in writing
If parties do decide to remain in business together, they should ensure that there is a written agreement, such as a shareholder’s agreement, to regulate how the business will be run. This should detail how they will share the responsibilities and what will happen if they can’t agree.
When dealing with business assets, there are often just as many practical considerations as legal ones. Is there a market for the company's shares? How can the money be raised and paid out? What are the tax consequences? What will the impact on the company be as a going concern if money is extracted? There is a lot to consider.
Divorce of Amazonian proportions
MacKenzie Scott and Amazon founder Jeff Bezos’s divorce was very different from the Gates's, as there was to be no ongoing business relationship.
Before their 2019 divorce settlement, Bezos held a 16.3% stake in Amazon, which he had started from his garage in Seattle in 1994.
As part of the settlement, Bezos retained 75% of his holding, transferring 4% to Scott on the basis that she transferred all her voting rights to him. This is thought to be the largest divorce settlement by quite some stretch, valued at US$35.6bn.
Scott also gave up her interests in the Washington Post newspaper and Bezos's space travel firm Blue Origin, which recently saw him launched into space.