Divorce of a Business Owner and Division of Company Shares: Determining Separate Property and Dividing Assets Without Handing Over Shares

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When part of a business owner's company shares passes to the former spouse in a divorce, that person remains a shareholder of the company even after the divorce is finalized. They can exercise voting rights at shareholders' meetings and, with a certain shareholding ratio, can also demand inspection of the accounting books. In the future, when selling the company or consolidating shares in a successor, the former spouse's shares will also need to be bought back. This is why discussions on the division of property connect directly to questions of control of the company and business succession.

There are two things the business owner should check first. Which of the company shares in hand are subject to division of property? And, for the shares that are subject to division, can the matter be settled in cash without handing over the shares themselves? How to calculate the valuation of the shares is covered in Valuation of Unlisted Shares in Division of Property on Divorce.

Property Subject to Division and Separate Property

Article 768(3) of the Civil Code (Japanese), as amended in 2024 (Act No. 33 of 2024, effective April 1, 2026), provides that the family court determines the amount and method of division taking into account "the amount of property acquired or maintained by both parties during their marriage and the degree of each party's contribution to its acquisition or maintenance" and all other circumstances. The period within which a request for division can be made to the family court was also extended from two years to five years from the time of divorce (proviso to paragraph 2 of the same Article). However, if the divorce took place before the effective date, the former two-year period continues to apply (Article 4 of the Supplementary Provisions of the amending Act).

Which property is subject to settlement as "property acquired or maintained during the marriage" is determined in relation to Article 762 of the Civil Code. Paragraph 1 of that Article treats property that one spouse owned before the marriage and property acquired during the marriage in that spouse's own name as that spouse's separate property. Paragraph 2 presumes that property whose ownership between the spouses is unclear is jointly owned.

Case law treats the subject of settlement in division of property as the substantively joint property held by the spouses during the marriage (Supreme Court judgment of July 23, 1971, Minshu Vol. 25, No. 5, p. 805). In practice, the wording "property acquired in one's own name" in Article 762(1) is not read by reference to title alone, and the following distinctions are made.

• Property owned before the marriage, and property acquired gratuitously from a third party during the marriage by inheritance or gift: separate property, excluded from settlement
• Property acquired for consideration during the marriage: in principle subject to settlement, regardless of which spouse holds title
• Property acquired by selling separate property and buying a replacement: remains separate property as a substitute for the separate property
• Property for which separate property was used for part of the acquisition price: excluded from settlement in proportion to that share

The burden of proving that property is separate property is understood to lie with the party asserting that it is separate property. Because of the presumption of joint ownership in Article 762(2), property acquired during the marriage is treated as subject to settlement unless its separate character becomes clear from the circumstances of its acquisition.

Even if property is separate property, that is not necessarily the end of the matter. There are court decisions that, where one spouse's cooperation contributed to maintaining or building the other spouse's separate property, treated the portion corresponding to that cooperation as subject to settlement. These decisions recognized the wife's contribution to the husband's family business or to the management of his separate property and allowed division of a certain percentage of the separate property (Kyoto District Court judgment of December 22, 1993, Hanrei Jiho No. 1511, p. 131, among others). The fact that amended Article 768(3) expressly includes "property maintained," in addition to property acquired, as a factor to be considered is also thought to be in line with this trend.

Property held in the company's name is the property of the corporation and is not the spouses' property. What is subject to settlement is, strictly, the shares held by the business owner personally. However, where the company is in substance no different from a family-run sole proprietorship, there are court decisions that treated property in the company's name as subject to division (Hiroshima High Court, Okayama Branch, judgment of June 18, 2004, Hanrei Jiho No. 1902, p. 61).

Methods of Division and Procedures for Transferring Shares with Transfer Restrictions

Regarding the method of division, Article 154(2)(iv) of the Domestic Relations Case Procedure Act (Japanese) provides that, in a ruling on a disposition concerning the division of property, the family court may order the payment of money, the delivery of things, the performance of registration obligations or other performance. The method of division is determined by comprehensively considering the type of property, who holds title, the wishes of the spouses, the need to acquire the property in kind and so on. Where the dividing party holds title to the property, it is said that payment of money is often ordered.

When transferring shares in kind, if the company's articles of incorporation restrict the transfer of shares, the transfer approval procedure under the Companies Act (Japanese) is required. In addition to the transferring shareholder requesting the company's approval (Article 136), the person who acquired the shares can also request approval (Article 137(1)). Unless the articles of incorporation provide otherwise, whether to approve is decided by resolution of the shareholders' meeting (or the board of directors in a company with a board of directors) (Article 139(1)). If the company does not approve and the requesting party has requested a purchase, the company will purchase the shares itself or a purchaser designated by the company will purchase them (Article 140). The purchase price is determined by agreement, but a petition for a price determination can be filed with the court within 20 days, and if there is neither an agreement nor a petition, the amount calculated on the basis of net assets per share becomes the purchase price (Article 144).

Article 174 of the Companies Act permits the articles of incorporation to provide that the company may demand that a person who acquired shares with transfer restrictions through inheritance or other general succession sell those shares to the company. Acquisition of shares through division of property is a specific succession in which individual assets are succeeded to individually and does not constitute general succession, so this provision of the articles cannot be used.

Tax treatment is also a factor when choosing the method of division. Where assets such as shares are transferred as division of property, case law holds that the dividing party obtains the economic benefit of the extinguishment of the obligation to divide, and allows capital gains taxation on the dividing party (Supreme Court judgment of May 27, 1975, Minshu Vol. 29, No. 5, p. 641). Basic Circular on the Income Tax Act 33-1-4 likewise treats the asset as having been transferred at its market value at the time of division. The receiving party is normally not subject to gift tax. However, gift tax applies to the excessive portion where the amount of the division is excessive even in light of the amount of property obtained through cooperation during the marriage and other circumstances, and where it is found that the divorce was used as a means of avoiding gift tax or the like (Basic Circular on the Inheritance Tax Act 9-8).

How the Company Shares Were Acquired and Choosing the Method of Division

Applying the standards described so far to a business owner's company shares, the conclusion differs depending on when, and with what funds, the shares were acquired.

Shares subscribed for when the company was established before the marriage are separate property. The same applies to shares inherited or received as a gift from the previous generation before the marriage, and to shares inherited from a parent during the marriage. On the other hand, where the company was established during the marriage with capital paid in from the couple's savings or the business owner's salary, the shares are substantively joint property of the couple and subject to settlement, even if they are held solely in the business owner's name. Even for a company established before the marriage, the portion of any capital increase subscribed for during the marriage is subject to settlement if the funds for payment came from income during the marriage.

Where the value of shares that are separate property has increased substantially during the marriage, the judgment becomes difficult. As long as the shares are separate property, the starting point is that the appreciation is also included in the separate property; but if it is found that the spouse's taking on housework and child-rearing, allowing the business owner to concentrate on management, contributed to maintaining the value of the shares, part of the value may be brought into settlement. Where the spouse actually helped with the company's accounting or sales, that possibility is thought to be even higher.

Care is also needed with shares held in the spouse's name. Even if the spouse was given shares for purposes such as inheritance tax planning, if the funds for paying in or purchasing them came from the couple's income, they are subject to settlement regardless of title. In relation to the company, the shareholder on the shareholder register remains the spouse, so even after the divorce, the spouse's status as a shareholder does not automatically revert to the business owner.

Considering the burden of proof, the documents the business owner should prepare are clear: bank passbooks showing the source of the funds paid in at the company's establishment, the history of the shareholder register, the registration of capital increases and records of payment, and estate division agreements or gift agreements showing that shares were acquired by inheritance or gift. The more years that have passed since establishment, the longer it takes to collect these documents, so if there is a chance of asserting separate property, they need to be gathered at an early stage.

To avoid handing shares over to the former spouse, the business owner pays a settlement payment equivalent to the valuation of the shares subject to settlement. If funds for the settlement payment are not on hand, options include installment payments, borrowing from the company and revising director compensation. A transaction in which a business owner who is a director borrows from the company constitutes a conflict-of-interest transaction under the Companies Act and requires the approval of the shareholders' meeting (or the board of directors in a company with a board of directors) (Article 356(1)(ii) and Article 365(1) of the Companies Act). There is also the method of having the company buy back part of the company shares to raise funds, but acquisition from a specific shareholder requires a special resolution of the shareholders' meeting (Article 160(1) and Article 309(2)(ii) of the Companies Act) and is subject to the financial restriction that it be within the distributable amount (Article 461(1) of the Companies Act). In addition, the selling business owner may be taxed on a deemed dividend.

Conversely, even where shares are transferred to the former spouse as a result of an agreement or ruling, the company can, through the transfer approval procedure described above, refuse approval and purchase the shares itself or through a designated purchaser. For a company that does not want the former spouse to remain a shareholder, the transfer restriction provision is the last resort. Where the company itself purchases the shares, this purchase is also subject to the financial restriction of being within the distributable amount (Article 461(1)(i) of the Companies Act), so if funds are insufficient, the business owner personally, relatives or others need to be designated as purchasers. However, because the purchase price is determined by agreement or by court decision, the valuation issue fought over in the division of property will be fought again in the price determination procedure under the Companies Act.

Before agreeing to divide shares in kind, it is necessary to confirm that the business owner making the division will be subject to capital gains taxation. There is a Supreme Court judgment that reversed a lower court decision that had rejected a claim of mistake regarding a division of property made under the mistaken belief that it would not be taxed (Supreme Court judgment of September 14, 1989, Kasai Geppo Vol. 41, No. 11, p. 75). If the matter is settled with a settlement payment, the issue of capital gains for the dividing party does not arise.

Before marriage, there is also the method of agreeing on the ownership of company shares in a marital property agreement. Article 755 of the Civil Code permits a separate agreement regarding property before the notification of marriage, but to assert it against the spouses' successors or third parties, registration is required by the time of the notification of marriage (Article 756), and the property relationship cannot be changed after the notification of marriage (Article 758(1)). That said, it is not clear how far such an agreement binds the determination of division of property at the time of divorce, and it cannot be said that the existence of an agreement will necessarily exclude the shares from division. If already married and the spouse has become a shareholder, one approach is to provide in a shareholders' agreement a clause allowing the business owner or the company to buy the shares on grounds such as divorce, together with a method for calculating the price.