The founding and entrepreneurial development of a start-up often takes place at a time in life when founders are getting married. In the event of a divorce at a later date, the shareholding in the company is subject to the so-called equalisation of gains (Zugewinnausgleich). This leads to difficulties that can be avoided by a marital agreement. The marital agreement does not have to be concluded before or at the beginning of a marriage. It can be concluded during the entire marriage and even in the event of separation or divorce.
1. Legal Matrimonial Property regime: the community of accrued gains
Without a prenuptial agreement, married couples live by law in the matrimonial property regime of the community of accrued gains (Zugewinngemeinschaft). This term is misleading. During the marriage, the spouses do not automatically acquire joint assets. Rather, from the law point of view, each spouse manages for himself or herself. Of course, spouses can jointly acquire property, such as real estate, or hold a joint account. However, the assets of both spouses remain otherwise separate.
The community of accrued gains leads to a financial equalisation claim in the event of a divorce. In this instance, the gain during the marriage must be calculated for each spouse by determining the initial and final assets. The difference between the initial and final assets represent the gain of each spouse. The spouse with the higher gain during the marriage must pay half of the difference to the other spouse as a so-called equalisation of gains. The claim to equalisation of accrued gains is directed at money; it cannot be fulfilled by non-cash assets (unless the spouses agree on this).
This legal situation leads to considerable difficulties in the case of shareholdings – especially in the case of start-ups. For example, the value of the investment must be determined for a reference date that may date back a long time. Furthermore, there is the question of how to value shares that are or were still in vesting on the fixed date. In many cases the participation in the company is the most important asset. Since the claim to equalisation of gains must be settled in cash, this could force the founder to (partially) sell his or her shareholding. This is often not possible without further ado or only under economically disadvantageous conditions due to company contract regulations (restriction on transferability, sale only to co-partners, termination restrictions).
2. The marital agreement for founders
The legal standard model can be adapted by means of a marital agreement.
a) Lump-sum separation of property is often only second-best solution
It is possible to agree on the so-called separation of property (Gütertrennung) in the marital agreement. In this case, there is no equalisation of gains as described above. However, the separation of property has disadvantages: the legal right of inheritance of the spouse changes as a result of the separation of property. The children’s claims to a compulsory portion increase, which makes it more difficult for the spouses to arrange their inheritance. Furthermore the spouses lose the inheritance tax privilege of the community of accrued gains, according to which a fictitious equalisation of gains of the surviving spouse remains free of inheritance tax. It is therefore often not advisable to exclude the equalisation of gains by agreeing to separate property.
In addition, the separation of property is often not in line with the spouses’ joint ideas, according to which both contribute and participate to the mutual success, also in the event of divorce.
b) Modified community of gains
In order to maintain the inheritance advantages of the community of gains and at the same time to get the disadvantages under control in the event of divorce, the so-called modified community of gains (modifizierte Zugewinngemeinschaft) is often recommended. In this case, the legal regulations of the equalisation of gains are modified for the case of divorce. There are many possibilities for this, which need to be discussed in detail.
- Company shareholdings, for example, can be excluded from the equalisation of gains. In this case, it is advisable to regulate how investments in these so-called privileged assets are to be treated in order to prevent misuse. It is also necessary to regulate how the sale of privileged assets is to be treated (should the proceeds of the sale and any reinvestment remain privileged assets or fall under the equalisation of gains).
- The spouses can determine the value of their initial assets in a prenuptial agreement. In the event of divorce, there is then no need for the often conflict-prone determination of the initial assets (and backdating to the start date). At the same time, valuation regulations can be agreed for company investments (valuation procedure; expert regulation; reference to the last financing round, etc.).
- A cap on the equalisation of gains is also possible.
- Finally, regulations on the maturity/deferral of the claim to equalisation of gains are an option. The claim to equalisation of spousal gains can be deferred until, for example, profit distributions or an “exit” occurs. This prevents the economically disadvantageous sale of shares for the purpose of fulfilling the equalisation of profit claims. If distribution and exit proceeds do not accrue to the spouse personally but to an investment vehicle controlled by him or her, this must be taken into account when drafting the contract.
- Arrangements for the fulfillment of the equalisation of gains in kind – such as company shares – are often not recommended, as this can lead to the disclosure of hidden reserves and is therefore disadvantageous from a tax point of view.
3. It is (almost) never too late: The separation and divorce settlement agreement
If entrepreneur couples have not concluded a prenuptial agreement, the economic settlement of the marriage can still be regulated in a so-called separation and divorce succession agreement.
The advantage of a timely prenuptial agreement is, of course, that an arrangement can be found, in an emotionally uncharged situation, that makes economic and tax sense for both spouses.
(27 May 2022)