Your business is likely one of your most valuable assets, but certain actions—especially during marriage—could put it at risk in the event of a divorce. This article outlines the essential legal measures that business owners in South Africa can take to protect their enterprises.

Matrimonial Regimes in South Africa 

South Africa recognizes three marital regimes, each with distinct implications for asset division:

In Community of Property (default) 

Both spouses share an equal stake in the joint estate, including assets, liabilities, and debts acquired before and during the marriage, unless explicitly excluded by an antenuptial contract (ANC).

For business owners, this means that shares in a company, partnership interests, or ownership of a sole proprietorship are included in the estate. However, the business entity’s assets and liabilities belong to the juristic entity and do not fall within the joint estate.

Claims against the joint estate or a spouse’s individual estate are assessed either on the date of divorce or the death of a spouse.

Out of Community of Property with the Inclusion of the Accrual System 

This regime allows spouses to maintain separate estates. However, the spouse with the lesser growth in their estate over the course of the marriage may claim half of the difference between the two estates’ values at the time of divorce or death.

Out of Community of Property without the Accrual System 

Under this regime, each spouse retains full ownership of their individual assets throughout the marriage, without any claim to the other’s property or business interests unless they agree otherwise.

The Valuation of Business Interests 

During divorce proceedings, any business interest involved must be accurately valued. The valuation process requires the expertise of forensic accountants, business appraisers, or actuaries. The specific valuation method depends on the business type—whether it is a public company, a private entity, or a small family-owned business. Financial experts will assess key factors, including the company’s financial statements, cash flow, assets, and liabilities, to determine its worth.

Division of Business Interests 

Once a business interest has been valued, the next step involves determining how it will be divided. There are several options: 

Sale of Shares: A spouse may sell their shares to a third party or back to the company, with the proceeds divided equally. 

Transfer of Shares: A spouse may transfer part of their shares to the other spouse, making them co-owners of the business. 

Buy-Out Agreements: One spouse buys out the other’s share, often requiring significant liquidity to fund the transaction.

Given the complexity of business valuations and the financial scrutiny that accompanies divorce proceedings, business owners should take proactive steps to secure their interests.

Proactive Measures for Business Owners

Execute an Antenuptial Contract (ANC) 

By marrying Out of Community of Property, a notary attorney can draft an ANC to exclude business assets from the joint estate, thereby providing a straightforward safeguard.

Register a Postnuptial Contract 

If no antenuptial contract was signed, spouses can apply to change their marital regime to Out of Community of Property by registering a postnuptial contract with the High Court.

This process, governed by Section 21(1) of the Matrimonial Property Act1, requires the applicant to provide a valid reason for the change, notify creditors and the Registrar of Deeds, and demonstrate to the court that no third parties will be prejudiced.

Incorporate Protective Clauses in Shareholder Agreements 

Business owners can include clauses in shareholder agreements that govern what happens to shares in the event of a divorce. For example, the agreement can stipulate that shares cannot be transferred to a spouse without the other shareholders' consent.

Maintain Comprehensive Financial Records 

Keeping detailed financial records ensures a smoother valuation process and helps to substantiate a business owner’s claim to a fair share during divorce proceedings.

Offer Lump-Sum or Buy-Out Options 

If divorce proceedings are amicable, business owners may offer a lump sum or buy-out to maintain full ownership. This arrangement often involves compensating the other spouse with other assets in exchange for their share of the business.

Consider Alternative Dispute Resolution (ADR)

In contentious divorce proceedings, mediation can offer a constructive alternative to litigation. A mediator can present mutually beneficial solutions, potentially minimizing disruption to the business and facilitating a fair resolution.

Conclusion  

Understanding the implications of South Africa’s marital regimes is essential for business owners looking to protect their enterprises. Implementing key safeguards—such as executing an antenuptial contract, integrating protective clauses into shareholder agreements, and maintaining meticulous financial records—can help mitigate risks during divorce proceedings. By taking these proactive steps, business owners can ensure that their businesses remain secure and continue to thrive, regardless of personal changes.

Written by Ross Hendriks, SchoemanLaw Inc