To avoid dispute in the event of a relationship problem it is always advisable to ensure you have from the outset fully considered and understand the structure of your business, each party’s involvement, responsibilities, duties and interests.

The starting point within any dispute is to consider the terms of a Partnership Deed or to look at the provisions within a Shareholder's Agreement. Unfortunately, family businesses often neglect to have such documents in place and in particular, do not consider fully what might happen should the personal relationship of the business owners fail. This then leaves the parties at the mercy of the family court.

When discussing your business advice should be taken from your corporate and family solicitor to ensure your family circumstances are fully considered and practical solutions can be offered should the relationship not work. This advice should be combined with financial and taxation advice. The corporate and family teams at Howes Percival work closely together in advising family businesses to ensure these issues are properly addressed.

What can be done to protect the family business?

Various steps can be taken to limit a family business’ exposure on divorce. The specific circumstances will determine which are appropriate and in our experience any advice taken should be across the board, combining asset protection with financial and taxation advice to ensure that the steps being taken meet the family’s objectives.

Options include:

  • Pre or post nuptial agreements - It is possible for a couple to enter into an agreement either before or after they marry with the aim of protecting the family business, often by ring fencing any interest in the business from a financial settlement. These agreements can also be prepared in conjunction with the passing on of shares or business assets to the next generation.
  • Controlling the ownership of shares - Family shareholders of a company can establish a policy that shares in the family business can only be held by members of the original family, not their spouses, and that if such shares are required to be sold they must be offered to original family members only. The company’s articles of association could also provide that shares transferred to a spouse should be bought back by the business in the event of a divorce. The court will always retain discretion to make orders over any shareholding owned by either of the divorcing couple but at the very least such provisions may be influential.
  • Introduce different classification of shares
  • Involving Trustees - Instead of transferring shares outright to spouses or family members, consider transferring them to trustees to hold for their benefit. This cannot be guaranteed to take them out of account on divorce, but adds a further layer between the interest in the family business and the divorcing spouse and will make a claim by them much harder.

Considerations for the businesses during a divorce

Businesses on divorce is a specialised area, and the approach to a business divorce case requires careful consideration and handling in order to avoid as much disruption to the business as possible.

Issues can also arise when one spouse is on the payroll of the other’s family business or they may be a minor shareholder. This brings about other considerations; what is that spouse’s interest in the business worth? Does that spouse have employment rights that require consideration? Our family team works closely with our employment and corporate specialists.

If other shareholders or business owners might be affected by decisions within the divorce proceedings. The result is that third parties (interveners) may have to apply to intervene in the divorce proceedings in order to protect their position. Suddenly the breakdown of a marriage takes on another dimension.

Is my business treated as an asset of the marriage when considering how to divide our marital assets?

Each case is different, but yes, in most cases the value of a business is taken into account along with the value of any other assets such as the home, savings pensions etc. The value of the business itself can often be a contentious point, with both parties usually having a very different view as to what the business might be worth and it may be necessary for an expert to be appointed to value the business. The value of the business may not have as much significance in short marriages.

How is a business valued on divorce?

The common approach to this issue is for the business to be valued as part of the divorce process by a forensic accountant who is appointed by both parties' solicitors. They can also be asked to provide an opinion on other important factors that should be borne in mind when considering a business case, such as issues of liquidity and whether one spouse can draw significant sums from a business to meet a financial settlement. Tax issues are also important, as is the ability to extract tax efficient cash. All of these factors are relevant as to how an order or a settlement can be structured.

In some divorces there may be concern that one spouse is hiding money through the business or through a group of companies. In those cases an expert accountant will need to be instructed to thoroughly investigate that spouse's business affairs.

Is my spouse entitled to half of my business?

It is extremely unlikely that your wife or husband would be given a direct interest in your business, for the majority of divorcing couples this would be completely unworkable. The more common approach is that if you were to retain your business then your spouse may be given some other assets to compensate them.

Will the court force a sale of the business?

Usually, a family business is the main source of financial support. In these circumstances the court's main concern is to try to preserve it wherever possible, so it is rare that a court would order a business to be sold. It is often the case however if a family business is to be preserved then the other spouse needs to be provided with sufficient capital and/or maintenance to address any imbalance.

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