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Head of Family and Inheritance Law Practice, Attorney, Mitrax
Division of Business Assets Between Spouses
The division of business assets between spouses is a complicated process, since corporate rights (shares, stakes in a company’s authorized capital) may be the subject of a dispute, which in turn can lead to a corporate conflict. When acquiring the status of a corporate rights holder, spouses rarely pay due attention to the specific aspects of dividing such rights when getting divorced and fail to negotiate settlement so as to eliminate litigation risks and avoid causing harm to a legal entity.
As a result of the lack of legal regulation enabling the explicit establishing of a matrimonial regime in respect of corporate rights, spouses fail to understand the options of dividing business assets, the procedure and ways of dividing the same between them. In this regard, we need a more in-depth study of which corporate rights are to be divided and the ways to do this, as well as the procedure for dividing the property of an individual entrepreneur, subject to general provisions of law, which regulates matrimonial property matters, corporate rights and case law relations.
Ukrainian family law provides for a matrimonial property presumption (Art. 60 of the Family Code of Ukraine No. 2947-III of 10 January 2002). It states that any property acquired within marriage is matrimonial property, except for property excluded from civil-law transactions and personal items. Therefore, referring to the above presumption it can be concluded that all immovable and movable property and other things, which were acquired within marriage, are matrimonial property.
In turn, the analysis of the provisions of law suggests that matrimonial regime only applies to things, and the issue of corporate rights acquired by either spouse within marriage is yet to be regulated.
The Plenum of the Supreme Court of Ukraine clarified certain issues in its Resolution No. 11 of 21 December 2007 (hereinafter — the Resolution of the Plenum of the Supreme Court of Ukraine), having stated that when resolving the issue of dividing property presented as shares and stakes (equity units, interests) in the funds of corporate business organizations, a court must proceed from the fact that the issue of dividing such shall be resolved depending on the type and form of incorporation of a legal entity, and the nature of the relations of the spouses with such entity.
In view of the above, it is necessary to consider in detail the issue of division of corporate rights in legal entities of the most common forms of incorporation in Ukraine, as well as division of property of an individual entrepreneur (private enterprise), and we shall start with a joint-stock company.
Division of Shares in a Joint-Stock Company
The Law of Ukraine On Joint-Stock Company provides the definition of a term “joint-stock company”. Thus, a joint-stock company is a business company, the authorized capital of which is divided into a designated number of stakes with the same par value, corporate rights to which are certified with shares.
Therefore, a share is nothing but a security. Thus, according to Article 177 of Civil Code of Ukraine No. 435-IV of 16 January 2003, it is an object of civil rights and may be matrimonial property.
However, although Law of Ukraine On Securities and Stock Exchange No. 3480-IVof 23 February 2006 stipulates that a share is indivisible, a shareholding is to be divided, since the mentioned shareholding is measured as a certain number of shares held by a relevant holder.
The position on whether or not a matrimonial regime applies to shares and the possibility of dividing them was formed a long time ago. In particular, it was expressed in the above Resolution of the Plenum of the Supreme Court of Ukraine. However, there is also one important condition, that the said shares must have been bought with the joint funds of the spouses.
Now, let’s move to the most common form of carrying out business activity, which is through the establishment of a legal entity, a limited liability company.
Division of a Share in the Authorized Capital of a Limited Liability Company
It should be mentioned that we already have established case law, including that expressed in the Resolution of the Plenum of the Supreme Court of Ukraine. In particular, courts proceed from the fact that a business company owns property, which was transferred to it by shareholders into ownership as a contribution to the authorized capital. Therefore, once joint funds are contributed to the authorized capital of a business company, or matrimonial property is transferred to such company, they are the company’s property. At the same time, the specified spouses’ joint funds (property) no longer have elements of a matrimonial property object, and the other spouse becomes entitled to compensation for the value of joint funds only, and not a share in the authorized capital.
Subsequent disposal of a share in the authorized capital by a company’s shareholder is the corporate right of such a shareholder.
Taking the above into account, it can be concluded that a contribution to the authorized capital of a limited liability company becomes a company’s property and is not a matrimonial property object, and so cannot be divided. In this regard, when drafting claims in respect of division of spouses’ property, namely division of a share in the authorized capital of a limited liability company, one should not ask for equal splitting of a share between spouses, but for compensation for half of the value contributed.
Finally, we have reached the most challenging business type of entity. Division of property acquired by such entity for carrying out its business activity — an individual entrepreneur (hereinafter — “individual entrepreneur”).
Division of Property of Individual Entrepreneur
It is well-known that an individual entrepreneur has no standalone balance sheet like a limited liability company. Moreover, it is only possible to register property in an individual’s name in the registers of titles, and not in an individual entrepreneur’s name. As a result, all mo-vable and immovable property, which is acquired by an individual entrepreneur, is registered in an individual’s name.
For that reason, and in order to distinguish an individual entrepreneur’s property from an individual’s property, the Resolution of the Plenum of the Supreme Court of Ukraine specified the following: “property of a private company or an individual entrepreneur shall not be a matrimonial property object. The other spouse shall be entitled only to a part of profits from such activity.”
However, case law on the division on both an individual entrepreneur’s and individual’s property was ambiguous, since in some cases the courts departed from the principle set by the Supreme Court. The Constitutional Court initiated significant changes when it clarified the provisions of Article 61 of the Family Code of Ukraine in its Decision of 19 September 2012 and stated that the authorized capital and property of a private company are a matrimonial property object.
Although the clarification primarily related to a private company, in practice the property of an individual entrepreneur also became a matrimonial property object. However, not all property did, but only that property which was acquired with the joint funds of spouses. If an individual entrepreneur managed to prove in court that property was purchased with his individual’s funds for the purpose of carrying out business activity, recognition of such property as the private property of an individual entrepreneur was common practice.
However, afterwards case law transformed in such a way that only the source of funds for acquisition of the individual entrepreneur’s property remained the criterion for recognizing it as matrimonial property. It means that if an individual entrepreneur’s property was acquired for carrying out business activity, but using the joint funds of spouses, such property should be divided.
The above is confirmed by the most recent practice of the Supreme Court of Ukraine. Thus, the Resolution of the Supreme Court of 25 April 2018 issued in case No. 344/1770/14-ц states that: an individual entrepreneur’s property (which is used for carrying out the business activity of an individual entrepreneur) shall be recognized as matrimonial property, like any other property, which was acquired within marriage, provided that it was purchased with the funds of the spouses.”
Therefore, taking into account the absolute joint common property presumption, the matrimonial regime also applies to corporate rights and the property of an individual entrepreneur if shares are purchased, cash or property contributed to the authorized capital, or property is purchased for carrying out business activity by an individual entrepreneur while the spouses are married. In this case, it should be borne in mind that:
— a shareholding in a joint-stock company and property of an individual entrepreneur, which was acquired for carrying out business activity, is to be equally divided between spouses, unless the other spouse proves that it is his/her private property;
— a share in the company’s authorized capital shall remain the property of a spouse who made a relevant contribution, while the other spouse may only claim compensation for half of the value of the contribution to the company’s authorized capital.