You want to carry on your professional activity through a company and, at the same time, you are in the midst of preparing your wedding: what order should things follow? If anticipation is the watchword in inheritance law, exactly the same applies to matrimonial property law. Depending on your assets and your respective professional activities, whether or not to draw up a marriage contract deserves just as much careful attention… as choosing the venue and the caterer !
If you do not go before a notary to draw up a prenuptial agreement, you will be subject to the statutory community property regime, which consists of three separate estates:
Each spouse’s separate property notably includes: clothing and items for personal use, and the assets and claims belonging to each spouse before the marriage or acquired during the marriage by inheritance or gift, etc.
The spouses’ community property notably includes: the income from each spouse’s professional activity (even if paid into a bank account in that spouse’s own name); the fruits, income and interest of their separate assets, together with the related debts; all assets not proven to be the separate property of one of the spouses, etc. So take care to keep proof of the origin of the funds (paid from community or separate property?), because, in case of doubt, whatever has been acquired is presumed to be common.
If, on the other hand, you draw up a marriage contract before the notary and opt for the regime of pure separation of property, each spouse will keep his or her own separate property, with no community property :
Each spouse always has exclusive management of his or her separate property, whether or not there is a marriage contract.
Matrimonial property law offers still other possibilities, such as separation of property combined with a limited community of acquisitions (“société d’acquêts”), but for the sake of brevity we will address only the two main regimes mentioned above — all the more so because spouses who draft a tailor-made marriage contract will have taken care to anticipate and settle by agreement everything that follows.
This preliminary question — whether or not to draw up a marriage contract — is decisive for what comes next.
The holder of a company’s shares, the shareholder, has his name entered in the company’s share register. He may exercise voting rights at the company’s general meetings, decide on the amount of profits to be distributed and, where applicable, receive a dividend.
To acquire those shares, did the spouse use his own funds drawn from his separate property, or was it money belonging to the spouses’ community property?
Your company was incorporated after your marriage and you wish to make a cash contribution to it. Will you draw on your separate property or on the property you hold in common with your spouse? The question is similar for a contribution in kind: where does the building you are contributing come from, and to whom does it belong? Is it the family’s main home (which enjoys specific protection)? Is it held in undivided co-ownership with other people? None of these questions is trivial.
It will also be necessary to check whether certain acts (contribution, transfer, etc.) require the spouse’s consent where community assets are involved.
Let us imagine several scenarios :
Indeed, shares acquired (for more than half) with a spouse’s own funds belong entirely and exclusively to that spouse. He has exclusive management of them, with full powers of administration, enjoyment and disposal. In the event of divorce, he faces no particular difficulty.
You have not concluded a marriage contract and you use — either exclusively, or for at least half — your professional income, or any other asset of the community property, to acquire shares or incorporate a company. Again, several scenarios must be distinguished :
The company’s shares were acquired during the marriage using community funds (either exclusively, or at least half community funds), and :
It is understood that, in this context, it does not matter who serves as a director of the company or whether the company is a professional firm.
In both of these situations, the shares belong to the community property. However, the law artificially splits the company’s shares between “the title” (the ownership right over the shares), which is the separate property of the shareholder spouse, and “thefinance” (the economic value of the shares), which is common to both spouses.
It is at the time the shares are acquired that this distinction must be properly drawn and that it must be checked whether the conditions of the Civil Code are met. Consequently, what happens after the shares are acquired no longer has any bearing (e.g.: the spouse is removed as director).
The dissolution of the spouses’ matrimonial regime gives rise to liquidation and division. The value of the shares is fixed as at the day the matrimonial regime is dissolved, and not the day of the division. In concrete terms, since the “title” is the spouse’s separate property, he does retain ownership of the shares after the regime ends; he walks away with his shares after his divorce. One can anticipate the frustration of the shareholder-and-director spouse who has run his professional company masterfully and single-handedly driven up the value of the shares… which will benefit both spouses upon divorce, given the common nature of the value, even though the other spouse had nothing to do with it.
CAUTION : all of the above applies provided there is no matrimonial agreement specifically providing otherwise. You can indeed tailor all of this in your marriage contract.
Outside the situations referred to in point 1, the shares are entirely common, with no separation between the title and the finance.
E.g.: both spouses acquire shares with funds from the community property, both are shareholders, both names appear in the register, and neither is a director or manager of the company: the shares belong entirely to the community property. The title/finance distinction is no longer needed, given that the shares have no personal character attaching to only one of the spouses.
E.g.: the wife incorporates a company with third parties (she is a shareholder) using funds from the community property, but she is neither a director nor a manager — she is an employee: the shares are common (both title and finance) and she does not benefit from Article 2.3.19, §1, 5°, since the cumulative conditions are not met.
In concrete terms, how are common shares belonging to the community property managed? The Civil Code provides for concurrent management between the spouses, not joint management (“management” meaning “full powers of administration, enjoyment and disposal”). The community property is thus managed by either spouse, who may exercise the management powers alone, each being bound to respect the management acts performed by the other (Article 2.3.30 of the Civil Code), it being understood that the spouses manage the community property in the interest of the family (Article 2.3.29 of the Civil Code). Each spouse may concurrently perform all acts of management in respect of them. There is, however, a nuance where the shares are regarded as attached to the profession of one spouse (Article 2.3.31 of the Civil Code)
The value of the shares is determined as at the date closest to the division. A division in kind by halves then often takes place (each leaves with half of the common shares).
If both spouses are shareholders (both hold registered shares and each is listed in the share register) and one of them has, in addition, been appointed director of the company :
Legal scholars are divided where both spouses are shareholders AND directors of the company: should the title/finance distinction be maintained? And what if the clause restricting share transfers targets third parties, but not the shareholders’ spouses ?
In conclusion: either the shares are separate, or they are common, or the distinction is drawn between the title (which is separate) and the finance (which is common)
In that case, a compensation mechanism applies upon the liquidation of the matrimonial regime, with a transfer from one estate to the other, since both contributed to the acquisition of the shares.
Under Article 2.3.44, paragraph 1 of the Civil Code, “compensation is owed by each spouse up to the amounts he has taken from the community property to discharge a separate debt and, generally, whenever he has drawn personal benefit from the community property".
Article 2.3.46 of the Civil Code specifies the amount and proof of compensation :
"The compensation may not be less than the impoverishment of the creditor estate. However, where the sums and funds that entered the debtor estate were used to acquire, preserve or improve an asset, the compensation shall be equal to the value or the increase in value of that asset, either at the dissolution of the regime if the asset is then in the debtor estate, or on the day of its disposal if it was disposed of earlier; if a new asset has replaced the disposed asset, the compensation is assessed on the basis of that new asset. The right to compensation may be established by any means of proof. Compensation bears interest by operation of law from the day the regime is dissolved.”
If I carry on my activity as a natural person, my professional income falls directly into the community property. What if I carry on my activity through a company ?
The rule is as follows : « A spouse who carries on his profession within a company whose shares are his separate property owes compensation to the community property for the net professional income that the community property did not receive and could reasonably have received had the profession not been carried on within that company » (Art. 2.3.44, para. 2 of the Civil Code).
The underlying intention of this provision is understandable: the choice to carry on one’s professional activity through a company must remain neutral, with no impact on the community property. Imagine the shareholders decide not to distribute a dividend, but instead to allocate the company’s profits to investments within the company itself. The shareholders see the value of their shares rise; the shareholder spouse who holds those shares in his separate property is delighted — the community property much less so. That operation takes place at the expense of the community property, which is normally fed by professional income, is not fed in this case, and is thus impoverished. A compensation mechanism was therefore put in place.
The calculation of the compensation provided for by this provision is unusual. It is not a matter of valuing the shares. Rather, regard must be had to the amount of the dividend that could have benefited the community property but was not distributed. The notion of “reasonably” could also be debated. More broadly, one can easily anticipate the practical problems this compensation will raise.
Beyond income, attention must also be paid to the risks attached to the professional activity, in particular where personal guarantees are given or the director’s liability is called into question, which may affect the spouses’ estates.
What happens upon the liquidation and division of the matrimonial regime (upon death or divorce)? When and how should the shares be valued ?
The issue matters little as long as the couple gets along and everything runs smoothly. Problems arise, as we know, when the matrimonial regime has to be liquidated and it must be determined what the community property — which will be split in two — can still claim. In practice, the involvement of each spouse in the company’s development is rarely equal. Imagine the frustration of the spouse who devoted his career to the business, driving up its value and, with it, the value of the shares… shares which form part of the community property and are therefore shared with the other spouse, who contributed little or nothing. Added to this is a further difficulty: determining the value of the shares. This frequently gives rise to disputes, or even the appointment of an expert, since the various valuation methods can lead to markedly divergent results.
The watchword is exactly the same as in inheritance law: anticipate, and provide for tailor-made arrangements reflecting each spouse’s respective involvement and investment (whether financial or personal).
Beyond the choice of matrimonial regime, particular attention must be paid to the origin of the funds, the way the shares are held, any clauses in the articles of association, and the risks attached to the professional activity, particularly where personal guarantees exist. Coordinated reflection between the notary and your tax adviser is, in this respect, essential to ensure the overall consistency of the arrangement.
All the pitfalls of the regime described above can be resolved by agreement. Where appropriate, a change of matrimonial regime may also be considered during the marriage in order to adapt wealth protection to the evolution of the professional activity.