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Protecting business assets following a divorce

Family businesses are among some of our most successful, and a powerful force in the national and regional economies.

The relationship dynamics of those running a family business are inevitably different to those in other businesses.This can be very positive when everyone is pulling together but when personal relationships breakdown the impact on the business can be devastating.The classic example of this is where a married couple divorce.Whilst it may be possible for the business relationship to continue more typically the partnership has to be dissolved or shares in the family company have to be transferred.

It is possible to plan for the possibility of such an event occurring with a view to protecting the business and associated assets.

Pre and post-nuptial agreements can set out what is intended in relation to business assets in the event of divorce and separation. Such  agreements are becoming increasingly common and although still not binding upon a court they are an important factor to be taken into consideration and if properly drawn have a real prospect of being upheld by the court.

Pre-nuptial agreements are drawn up prior to a marriage and have received a lot of publicity in recent years as the law has developed but many people fail to appreciate that a post nuptial agreement drawn up after the parties are married is likely to carry just as much, if not more, weight.

Another option is to consider placing assets into a trust. This can be very effective as part of an individuals tax planning.Assets placed in trust are not assets which are available to distribute in the event of a divorce. A court may examine the trust to ensure that it is genuine but it cannot access the assets in the trust itself and is limited to making orders against the individual spouse where satisfied assets can be accessed.

Where one or both of the parties are shareholders in a limited company shareholder agreements can be used to set out and limit options in relation to transfer of shares. It can clarify the position when difficulties arise and can avoid costly litigation. A shareholders agreement could be drafted requiring shareholders to execute pre or post nuptial agreements excluding the shares from the assets to be distributed on divorce.. Of course that would need to be coupled with the agreement of the spouse at the time to sign such an agreement.

Succession planning often triggers a discussion about all these matters.A parent who wishes to pass his or her shares in a family business to the next generation may have real concens about the impact of relationship breakdown and may choose to address this by placing assets in trust and/or seeking to persuade other family members to protect the business going forward by entering into the types of agreement discussed.

Family and divorce - head of Family and Divorce - Simon Gledhill