When marriage and business collide in Hong Kong: Crafting the best strategy

Family-owned businesses present unique challenges in divorce proceedings, particularly regarding asset division, valuation, and the future operation of the company.

In Hong Kong, the intersection of family law and corporate law requires careful consideration of both the legal remedies available and the practical implications for all parties involved. This summary outlines the key issues and solutions under the main topics relevant to family business disputes in divorce.

Family Court vs Companies Court

A recurring debate is whether disputes over family companies should be heard in the Family Court or Companies Court. Hong Kong courts generally favour the Family Court for efficiency and to avoid duplication of proceedings, unless relief is only available in the Companies Court.

In a recent case, the court emphasised that matrimonial disputes involving company ownership should primarily be litigated in the Family Court to prevent inconsistent findings and unnecessary costs. This approach promotes case management but can leave minority shareholders vulnerable, as certain remedies available in the Companies Court do not exist in the Family Court.

Orders under the Companies Ordinance 

There is growing recognition of the role corporate lawyers can play at various stages of matrimonial proceedings, and parties are encouraged to evaluate commercial alternatives as part of their strategy. This would include a consideration of action in the Companies Court to explore potential remedies against the companies themselves.

Unfair Prejudice

Minority shareholders who feel disadvantaged by the actions of majority shareholders during divorce may seek relief through an unfair prejudice petition under section 725(1) of the Hong Kong Companies Ordinance (Cap. 622). If unfairly prejudicial conduct is proven, the court has broad powers, including ordering the company to refrain from certain acts, authorizing civil proceedings, requiring changes to company articles, or mandating the purchase of shares from affected members. These remedies can address issues that the Family Court may not be equipped to resolve, especially when the dispute centers on corporate governance or shareholder rights.

Company Buyouts

Share purchase orders are common in family business disputes, allowing one party to buy out the other. The court determines the fair price and date of valuation, particularly if a majority shareholder has acted to depreciate share value before proceedings. Orders can extend to former members, directors, or others involved in prejudicial conduct. Additional remedies may include discovery, damages, appointment of independent management, or demergers. Buyouts are often preferred over winding up, as they preserve the income-producing asset for the family and avoid diminishing the company’s aggregate value.

Winding Up Orders

Winding up is rarely granted where the company is profitable or pays substantial dividends. Courts generally avoid creating the threat of liquidation, as it can diminish asset value and harm both parties. The court has also noted that winding up should not be used as leverage in family disputes, as it may be unfair to shareholders and detrimental to the business. 

Remedies in the Family Court 

Pursuing actions in both the Companies Court and Family Court is generally discouraged. Corporate remedies may instead be explored during negotiations or through separate proceedings before any matrimonial action. The courts recognise that there are many remedies which will protect the interests of the vulnerable in matrimonial law and that there are wide powers available to the Family Court, particularly under the Matrimonial Proceedings and Property Ordinance Cap 192 (MPPO).

Family Court remedies under the MPPO include:

• Section 17 Injunctions: Prevent or set aside transfers of shares intended to defeat claims.
• Mareva Injunctions: Worldwide freezing orders to protect assets.
• Capital Payments and Transfers: Lump sums or share transfers under sections 4(1)(c) and 6(1)(a). Courts may impose charges on shares or allow staged payments to ease cash flow.
• Sale Orders: Courts can order sale of assets where beneficial interest exists.

These aim to balance fairness and risk between parties, often combining lump sums with share transfers to achieve a clean break.

Considerations involved in corporate cases 

Valuing private family companies is complex due to the lack of a clear market and the volatility of profitability. Courts often appoint a Single Joint Expert (SJE) to provide guidance. Methods include asset valuation, dividend yield, or earnings. In AVT v VNT [2015] HKFLR 436, the court adopted a pragmatic approach, ultimately choosing the most reasonable for both parties. 

The English Court of Appeal in Versteegh v Versteegh [2018] EWCA Civ 1050 highlighted the fragility of private company valuations, noting that even expert opinions can vary widely. 

In some cases, courts have ordered shared ownership when valuation is uncertain. In Versteegh, the judge awarded the wife a percentage of shares alongside non-business assets, ensuring fairness but not finality. This approach, known as a Wells order, safeguards shareholder rights while minimizing disruption to business operations.

Out of Court Settlement – shareholders agreement 

Shareholder agreements and commercial solutions are increasingly recognized as effective ways to resolve family business disputes outside court. The Family Court can consider the nature and rights of shares to be transferred, but details are often negotiated privately. English courts have long encouraged commercial alternatives, such as allowing one party to operate the company while the other receives income benefits or deferred payments. These solutions can be fairer than a clean break based solely on valuation, especially when liquidity is uncertain or valuations are disputed. Practitioners are urged to consider commercial options and periodical payments, consulting experts as needed to identify viable alternatives. 

Key Takeaways

Family business disputes in divorce require a nuanced approach that balances the interests of all parties and the practical realities of running a company. Hong Kong’s legal framework provides a range of remedies through both the Family Court and Companies Court, but practitioners must be strategic in choosing the appropriate forum and solution. Whether through unfair prejudice petitions, buyouts, injunctions, or negotiated settlements, the goal is to achieve fairness while preserving the value and viability of the family business. Collaboration between family law and corporate law experts is crucial for navigating these complex cases and ensuring equitable outcomes.