On Cash Flows, Governance, Pension Liabilities in Closely Held Companies, and Valuation Dates
Introduction
Where business assets form part of the marital property regime, divorce inevitably extends beyond family law into the sphere of corporate and business law. Unlike ordinary property divisions, which are primarily arithmetic exercises, the division of an enterprise implicates corporate governance, financing structures and tax continuity.
The central issue is therefore not merely how the assets should be divided, but under what conditions division can occur without materially undermining business continuity. This requires a coherent assessment of cash flows, managerial authority, pension liabilities, valuation methodology and latent tax exposures. An isolated analysis of any one of these components will almost inevitably create distortions elsewhere in the system.
Capacity to Pay and Cash Flow: The Distinction Between Profit and Liquidity
In maintenance and property division proceedings, accounting profit is still frequently used as the primary benchmark. This approach disregards the fundamental distinction between profitability and liquidity.
Operating cash flow constitutes the relevant indicator of actual payment capacity. Investments, working capital fluctuations and debt service obligations may result in a profitable company generating limited free cash flow. It is the free cash flow — the funds remaining after maintenance investments and necessary financing costs — that determines the genuine capacity for private withdrawals or equalisation payments.
Arrangements that fail to reflect liquidity realities create tension between proprietary claims and business sustainability.
Pension in a Closely Held Company and Fiscal Sanction Risks
Particular attention must be paid to historical “pension in own management” structures (pensioen in eigen beheer) for director–major shareholders. In a prolonged low-interest environment, economic underfunding of pension reserves is common. If, in the context of divorce, pension rights are materially reduced or effectively waived, this may constitute a prohibited act for tax purposes.
The fiscal consequences are severe: taxation based on the market value of the pension rights, increased by penalty interest (revisierente). The combined burden may approach approximately 72 percent. Thus, a civil law desire for final settlement may conflict with mandatory tax consequences.
Moreover, transferring pension entitlements to the former spouse in circumstances of structural underfunding may raise concerns under principles of reasonableness and fairness. Dividend policies and shareholder loan accounts must therefore be critically assessed, as they directly affect funding levels and the corresponding tax risk profile.
Management Authority and Governance During the Transitional Phase
The question of who is authorised to perform management acts in respect of business assets is not merely theoretical. Transactions falling outside the ordinary course of business — such as granting security interests or restructuring assets — may require spousal consent under marital property law.
Following dissolution of the marital property regime, a transitional phase arises prior to actual division. During this period, the enterprise must continue to operate while safeguarding the proprietary position of the non-operating spouse. Transparency and prudence in decision-making are not simply advisable; they are essential to ensure legal robustness.
Division and Liability for Debts
Debts are not divided as assets; however, the internal burden-sharing between former spouses generally remains equal. Joint and several liability may persist following dissolution, though recourse against the non-operating spouse is typically limited to the assets received in the division.
From a corporate law perspective, timely allocation of the business to the operating entrepreneur is often advisable. Prolonged co-ownership introduces uncertainty for creditors and may weaken the company’s financing position.
Valuation: Method, Valuation Date and Financeability
Business valuation is inherently contextual. In divorce cases, the premise is generally continuation rather than liquidation, making going-concern valuation methods more appropriate than liquidation values.
Commonly applied approaches include:
- the asset-based (net asset) method;
- the earnings multiple method;
- the discounted cash flow (DCF) method.
The DCF method most closely aligns with the continuity principle, yet it is highly sensitive to assumptions regarding future cash flows and the applied weighted average cost of capital (WACC). The chosen methodology and parameters must therefore be explicit and verifiable.
The valuation date constitutes a separate issue. Alignment with the date of actual division is generally logical, unless principles of reasonableness and fairness justify an alternative date. Crucially, however, the resulting value must be financeable. A theoretically sound valuation without realistic financing options is economically unstable.
Latent Tax Liabilities
Latent tax liabilities materially affect net asset value. Whether such liabilities should be considered on a nominal or discounted basis may significantly alter the outcome of the division.
Consistency is decisive: the treatment of tax latencies must correspond to the valuation basis of the underlying asset. Additionally, the likelihood and timing of realisation are relevant considerations. An insufficiently reasoned or inconsistent treatment renders the division vulnerable to challenge.
Recurring Mistakes in Practice
Several structural misconceptions recur in practice. First, equating profit with available liquidity leads to unsustainable financial obligations.
Second, the consent requirement for extraordinary management acts is frequently underestimated, creating risks of invalidity or internal liability disputes.
Third, economic underfunding of pension reserves is often insufficiently assessed from a tax perspective, thereby ignoring potential sanction risks.
Fourth, latent tax liabilities are not always consistently or transparently incorporated into valuations.
Finally, valuations are sometimes presented without testing their financeability, undermining the practical executability of the division.
Conclusion
The divorce of an entrepreneur cannot be reduced to a purely civil property division. It affects the structure and resilience of the enterprise itself. Cash flows, governance, tax exposure and valuation form an interconnected system in which changes in one component inevitably influence the others.
A legally defensible and economically viable settlement requires an integrated approach that aligns valuation methodology, tax treatment and financing capacity. Only under such conditions can the continuity of an otherwise healthy business be safeguarded while maintaining a balanced protection of both parties’ legitimate interests.
