Protecting the family business during a divorce

Helen Lucking - December 11th 2017

Figures from the office of national statistics show that 42% of all marriages in the UK now end in divorce. These statistics affect business owners as much as the rest of the population, but for the family business owner the consequences of divorce could be disastrous. Such a business is often a limited company and the husband and wife are both directors and shareholders.

Upon divorce all assets owned by the parties, including their shareholding in the business, are valued and taken into account by the court. The court will always try to ensure that a business can continue to run as it is usually the main income for at least one of the parties.

If the limited company also has other family member members, then a shareholder agreement may have been entered into. Such agreements are very useful as they set out how the shares should be transferred within the business. For example, it can be used to prevent a hostile spouse from keeping shares in a family run business following divorce, against the wishes of the other shareholders.

Given what is at stake, and given the attention that family businesses rightly give to succession planning, serious consideration should be given to entering into a prenuptial or post nuptial agreement. These agreements set out in detail what will happen financially if the marriage ends. They provide some security and reassurance for the husband and wife or for other family members involved in the business.

Although prenuptial agreements are not yet legally binding in the UK, they have become increasingly common and are often taken into account by the courts, following the landmark case of Radmacher in 2010.

In that case the court handed down some guidance as to the necessary pre-requisites to be put in place when entering into such agreements. These include that the agreement must be entered into freely and willingly by both parties and must not result in an unfair settlement for either spouse.

To ensure that these agreements are upheld when called upon, it is also vital that each party obtains independent legal advice before signing the agreement. The agreement should also be made in good time and not for example, on the eve of the wedding. Observing these formalities will significantly increase the chances of the agreement being upheld by the court in any subsequent financial proceedings.

It is fair to say that most of us do not consider such agreements to be romantic, but as a means of protecting the family business they should be seen as a practical and business like approach to overall financial planning.

For further information, please do not hesitate to get in touch with a member of the Family & Divorce team.