For many couples, the ending of a marriage can result in many worries about the future. When there’s a family business to consider, this can add an additional layer of complexity to the financial negotiations.
As more people marry later in life, it’s not unusual for one or both spouses to come into a marriage having already acquired a career and some wealth of their own. This can include being part of a family business. When this is the case, protecting those business interests requires a blend of practical, legal, and financial strategies and sensible forward planning.
In this week’s blog, we’ll examine some of the essential bases you should cover to futureproof your family business against divorce*.
Don’t overlook the details
While some businesses are very good at dotting all the i’s and crossing all of the t’s, others aren’t as on the ball as they should be. When running a business in good times (without the consideration of divorce), it’s easy to overlook the importance of constitutional documents, leaving them untouched and unreviewed, even when the business has undergone significant changes.
In the face of business growth, expansion and increased share ownership, a family business can quickly become vulnerable when one of the shareholders decides it’s time for a divorce.
That’s why it’s essential to ensure that your company documents, specifically your articles of association and shareholder agreements, are fit for purpose.
Articles of association
Articles of association are, in essence, the rules that govern a company and create a contract between a business and its shareholders.
Articles can be bespoke to your company (although you’ll need to ensure that they comply with the Companies Act), and you may wish to speak with your company solicitor about including provisions that cover:
- Who can be a shareholder.
- Who shares in the company can be transferred to.
- Whether shares can be given to spouses.
- Should shareholders who are divorcing a family member be made to transfer their shares, and how will they be valued?
Shareholders agreement
Along with your company articles, review the shareholder agreement for your business and seek legal advice about the repercussions of making your spouse a shareholder in the first place. One provision you might be advised to consider as part of your shareholder’s agreement is a clause stating that spouses cannot receive shares unless current shareholders have been given first refusal.
The importance of pre-nuptial agreements
While you’re ensuring that your articles of association and shareholders agreements are up-to-date and in order, investing in a pre-nuptial agreement can also—pardon the pun—pay dividends.
In fact, a prenup is probably the best way to protect any shares you own in your family business, as it can serve to:
- ‘Ring-fence’ any shares that you hold in the property as property separate from the marital ‘pot’ in the event of a divorce.
- Prevent an ex-spouse from buying shares in the company once the divorce is final.
- Protect privacy by including a confidentiality agreement.
Although prenups are not legally binding in the UK, as long as they are entered into properly, with each party having taken legal advice, they are highly persuasive. On that basis, they can help reduce the chances of contentious court proceedings when it comes to financial negotiations during a divorce.
If you’re already married, you may want to consider a post-nuptial agreement instead.
What impact can a divorce have on a family business?
Divorce can significantly impact a family business, not least because it can take time to deal with requests for valuations, profitability, and other company information.
In addition, if tensions are running high, it may be difficult for you to continue working together and damage other family relationships within the business—all of which can create instability. There’s also the possibility that an ex-spouse who is an employee on the payroll will make a case for a bigger financial share of the business, arguing that their input has contributed to its success.
When protecting the interests of a family business on divorce, prevention is better than cure. Seeking expert legal and financial advice will help you to make the right decisions about the role (if any) that your spouse will play in your business, and help you to forward plan and ensure you’re prepared for any eventuality. If you’d like to discuss the benefits of a pre or post-nuptial agreement, all you need to do is get in touch.
*This blog is not intended as legal advice but for information purposes only. Always seek independent legal advice before making any decisions regarding your family business and how to protect its interests.
