Rights in private companies and in small businesses

To the extent that the rights were acquired in the course of the marriage (and not obtained by way of a gift or inheritance), these rights are also to be shared by both spouses.However, there is a difficulty as to the manner of their distribution, since actual joint holding of the company shares by both spouses or the determination that both spouses are partners in the business, results in continued friction in a relationship that they seek to end.Furthermore, many times, the spouse that was not active in the past in the business or in the company lacks the ability, understanding or willingness to act in the business or the company and it may be that he/she is active in another field or engaged in other work and does not have the option to enjoy the fruits of the company or the business other than by means of exercising the shares in the company or the rights in the business.In other cases, the distribution of the shares between the spouses is liable to lead, in effect, to serious disruption of the activity of the company or the business and even to a complete breakdown of operations.

Moreover, sometimes, where there are additional shareholders in the company, they are also not interested in a continued partnership with another entity and at other times the company’s articles of associations do not allow the transfer of the shares to the spouse (for instance, when one of the other shareholders has a right of first refusal).

Furthermore, the spouse who is not the original shareholder is liable to find himself/herself in a struggle for control of the company, fearing that the company or its activity will have their content drained as well as a fear of the minority party being exploited, etc.

The court in Israel has the discretion to decide on the manner of carrying out the balancing between the parties, under the Chattels Law, the Property Relations Law and the Family Courts Law.It was held in case law that in the event of distribution of shares in a family company it is advisable to refrain from a judicial decision which grants the shares themselves to the other spouse and to prefer the grant of a right to receive the value of the shares on the grounds set out above, although each case and each company should be examined under the circumstances.

In such cases disputes are likely to arise as to the manner of assessing the value of the business asset (company or private business) and in this regard there may be significant gaps between various assessments methods and various evaluations.At any rate, practically speaking, it is not always the case that one of the parties has sufficient economic means to purchase the other’s share in the rights.

Another way for distribution of the rights is the sale of the rights in the company or in the business to a third party. However, this also has a significant downside, particularly in the event of a business relying on the know how or skills of one of the spouses.Furthermore, sometimes that company constitutes a principal or exclusive source of income for the maintenance of one of the spouses and this should also be taken into account at the time of the divorce – for the best interests of the children, etc.

Further, there are also additional cases where the sale of the business asset to a third party is liable to adversely affect the couple or either of them.

Needless to say, other factors are added to the difficulty in distribution, for instance when one of the spouses claims that the origin of the rights in the company or in the business exists from before the marriage.

For professional and thorough advice in this context – contact us.