Share buybacks on divorce

In private companies with just a handful of shareholders, often all actively involved in running the business, a shareholder’s divorce can pose a significant risk. If shares become part of a financial settlement, an ex-spouse could end up as a shareholder, regardless of their connection to the company or their suitability for the role.

This situation is more than just awkward, it can destabilise the business. The remaining shareholders may be forced into an ownership relationship with someone who has no involvement, understanding, or alignment with the company’s goals. To avoid this, businesses can proactively include provisions in their shareholders' agreement or articles of association requiring a mandatory buyback or transfer of shares in the event of divorce.

Why use a share buyback in a divorce?

A share buyback is when the company purchases shares from an existing shareholder. In divorce cases, it can be used to:

• Facilitate asset division - if shares form part of a financial settlement, buying them back gives the divorcing shareholder liquidity without disrupting the business.

• Avoid future conflict - prevents an ex-spouse from gaining voting rights or dividends.

• Preserve control and continuity - keeps ownership among committed participants.

However, for a buyback to be mandatory and enforceable, it must be supported by appropriate legal documents and compliant with the Companies Act 2006.

How to include shareholder divorce planning in a private company

To ensure a smooth process and protect the business:

• Pre-emptive Agreements - include clauses in the shareholders’ agreement requiring a compulsory share sale or buyback in case of divorce.

• Share Valuation - define how shares will be valued, using an independent valuer or a pre-agreed formula.

• Funding - consider how the company or shareholders will finance a buyback (e.g. from reserves, loans, or insurance).

• Trigger Event - usually where a divorcing shareholder becomes subject to divorce or dissolution proceedings, and a court order or settlement may result in shares being transferred to their spouse or former spouse and where the ex-Spouse does not irrevocably disclaim any interest in the shares.

• Pre-agreed mechanics - including that the company and/or shareholders may purchase the shares at fair value, the company may elect to conduct a statutory share buyback, subject to the Companies Act 2006 and the divorcing shareholder being obliged to take all reasonable steps to prevent shares passing to the Ex-Spouse.

• Non co-operation - if the divorcing Shareholder fails to comply, the Company may appoint a director to execute all necessary documents on their behalf.

This clause provides clarity and security for all shareholders and ensures disputes can be managed fairly without harming the business.

How we can help

Our commercial and family law specialists advise clients on :-

• Drafting robust shareholders’ agreements and articles that deal with divorce and other critical events.

• Divorce financial settlement negotiations.

• Dealing with the share buyback if it becomes necessary consequent upon the divorce