Many SMEs in Kenya are family owned meaning that either the whole or a majority of the shareholding in the organization belongs to a family. Many people start a family business so as to preserve the technical knowhow within one family and also to preserve wealth in one family. Families with businesses in which technical knowhow is a key success factor would especially want to preserve ownership within the family. For example restaurants with recipes that have traditionally been handed down generations would like to preserve the secret within the family. Unfortunately family businesses do not always last long due to a number of managerial issues. In past articles on family enterprises which can be accessed at my blog www.commlawbiz.net, I have highlighted the need for family enterprises to install good governance structures and also instil good management principles in the organization.
However this time I want to zero in on a special type of family owned enterprise and that is the one owned between spouses. Many spouses start businesses with the hope that they will last and will leave a legacy for generations to come. While mostly this is the case, in some situations it is more complicated. Matrimonial disputes like divorce can crop up and affect the running of an organization owned between spouses. Divorce is a very emotive situation especially if the divorce is hostile…..the business will feel the impact of a hostile divorce owned between two spouses. Without naming names, there was a high profile separation last year, between a couple who owned a business together in Lang’ata area. The separation trickled down to the business as litigation suits and applications over matrimonial property were filed. The business was affected not only due to the matrimonial dispute but also because of a negative image arising from the bitter divorce.
It is therefore important to consider shareholder agreements when a couple is starting a business together. The agreement should set out what would happen to the business if matrimonial issues cropped up. For example one spouse can opt to exit the business amicably. It is important to consider a win-win situation especially where children are involved. Another option is to employ arbitration and mediation to resolve the business ownership dispute.
When a decree order in a divorce is issued, most of the times this runs down to matrimonial property, including family owned businesses. Once ownership disputes check in then automatically management disputes will also arise. I heard of a very interesting case where a couple were going through a very bitter divorce to the extent that employees were also polarized by it. Some employees took the husband’s side while the others took the wife’s. The effect of this is that nothing could go on in the business. Some employees went to the extent of insurbodinating whichever spouse they were not supporting, further adding salt to injury.
In a leading Kenyan divorce cause Muthembwa vs Muthembwa, the respondent took out an originating summons against her husband that the properties acquired jointly between them during the marriage be shared equally between them. The husband’s response was the respondent had not made any direct contribution to the acquisition of the matrimonial property and thus was not entitled to a share. One of the issues for the court to decide was whether the divorce court has jurisdiction to deal with shareholding in a company in which the spouses were shareholders. It was held that the court cannot decline jurisdiction to deal with company shares in divorce proceedings as it would be unjust…the divorce court therefore had the authority to deal with the company shareholding as it was a subject of matrimonial proceedings.
This means that in the event of a divorce, company shareholding and company shares can be dealt with by the court according to family & matrimonial laws. Going back to the high profile separation of the two business people, had either party sought orders from the court on how to deal with the company shares, then the divorce court would have jurisdiction to determine issues of shareholding. In the quoted case, the court ordered a 50-50 shareholding between the two spouses.
Back to the argument that the ownership of an organization determines the managerial structure then it is safe to presume that when orders such as these are sought then the order given would have a direct impact on the organization…in terms of management and operations. I would assume that parties going through a nasty divorce would not be in a position to run their business together and therefore the business would face high chances of voluntary winding up. Perhaps the reason for determining shareholding is to assess the value of compensation awarded to each party, should the company be wound up.