As a family lawyer working in a commercial law firm, I have seen at first hand the impact that the breakdown of a marriage can have on family owned and run businesses. An impact that, with foresight and planning, could have easily been avoided. With the divorce rate running at 42% can any business owner afford to ignore the risk?
Fact: the family courts have the power to order the transfer of assets between spouses on divorce. Assets include shares, cash, land and pensions. So if your son owns shares in the family company and he splits up with his wife she could be given a proportion (or all) of his shares as part of the divorce settlement. A potential recipe for disaster if ever there was one. A more likely alternative is that the shares will be valued and their cash value taken into account in the negotiations. Not a very palatable outcome for your son.
So what can you…and he…do to protect the family business?
So far as your son is concerned, a Pre Nup, (or Post Nup if he is already married), should do the trick. A lot of people think that Pre Nups aren’t binding. Wrong. If done properly, there is financial disclosure, the agreement is sorted out in plenty of time before the big day and it is not manifestly unfair, a Pre Nup will almost certainly be upheld by the court. A Pre Nup can be used to ring fence and protect company shares or other assets, eg inheritances or assets acquired pre marriage, but you can’t force your son, (or his fiancée for that matter), to go down this route.
So what if a Pre Nup is not an option? What can you do to protect your son and your company? Quite a lot, with the right advice.
Firstly, the Articles of the company can be used to prohibit a transfer of shares to spouses, a prohibition which a court is unlikely to challenge. Also consider how the Articles can be used to control dividend payments. This may in turn require a consideration of the existing share classes.
In a divorce situation the last thing you want is an over valuation of the share value. Any restriction on the shareholder’s ability to withdraw income or capital from the business will impact adversely on the value of their shares. Consider requiring 100% of the shareholders to agree to any dividend payments, remuneration changes or a sale of the business. This lack of control will impact on a share valuation. Be careful of any suggestion that the company is being run as a quasi-partnership which is likely to result in a pro rata valuation which ignores the usual discount for a minority shareholding, thus increasing the value of a minority shareholding.
These are complex issues which require considered advice from a mixed discipline team of family and corporate lawyers. Once one of the shareholders has started divorce proceedings it will be too late. Can you afford not to take advice now?
For more information or to discuss preserving your family business, please contact me here or Debra Martin (Corporate).
This article first appeared in East Midlands Business Link Newsletter on 20 April 2016.
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