2020 was a challenging year for many businesses. There has also been media speculation about the challenges to marriages as a result of lockdown and how the divorce rate may increase. So throw a business into the financial mix of a marriage breakdown and things can become more complicated on both fronts.
Protecting your business from divorce
A divorce which involves a business needs to be handled correctly. Most people realise it will need to be valued so that the shareholdings of the parties can be established. However, this is often the first complication as there are various ways to value businesses depending on their nature.
Thereafter consideration has to be given to the transfer of any shares, tax issues that might arise, liquidity if a capital payment is to be made, the impact on employment and income as well as how the business assets might be offset against other matrimonial assets. With this there needs to be consideration in terms of balancing the risk associated with assets; shares in a business are generally considered to be of higher risk than say, a house. This is relevant as a fair outcome should be achieved.
With this in mind it may be worth thinking of steps which can minimise the risk to the business before a divorce occurs. Clear legal documents can make it easier to unravel business interests as fairly as possible and considering the impact of divorce when setting up or making changes in the business can prevent future problems from arising. Here are some points to consider:
- Would a pre-nuptial or post-nuptial agreement be of benefit? Whilst still not automatically binding in England, provided that certain formalities have been complied with there is a strong chance that any agreement will be upheld. It will allow ring fencing of assets so that shares in the business are treated as separate property and not subject to sharing. This can be particularly important if you are bringing an existing, successful business into the marriage.
- Consider whether your spouse should be a shareholder. If they are, would you be able to buy out their interest on separation? If you are 50:50 shareholders, would they co-operate on business decisions such as the renewal of a commercial lease or re-financing prior to resolution of the financial matters on divorce? Business co-operation could become difficult if the personal relationship has soured.
- Should you enter into a shareholder's agreement? Terms can be reached ahead of any separation on issues such as what will happen to the business on separation including who will leave and whether there will be restrictions on transferring shares. You may want a written agreement about what rights the leaver would have to take clients, use confidential information or set up in competition. You could agree the method of valuation of shares.
- Think carefully before employing your spouse. It may become impossible for you to work together once there is a rift in your personal relationship but terminating employment could lead to employment claims. It might also result in an argument that they were integral to the success of the business.
- Debts - consider whether business debts should be secured against family assets. This can complicate matters and again, raises arguments that your spouse has an interest in the business because money from matrimonial assets will have been used to support it. Clearly document any loans to the business so that your extra investment is recognised.
If the worst does happen and your marriage comes to an end, instruct lawyers and accountants early to assist you. Also try and choose those who focus on resolution rather than dispute because that will make the process emotionally easier and more cost-effective. You may want to think about alternative forms of dispute resolution such as Collaborative Law or mediation as an alternative to court.
The Family Court will try and avoid an outcome which causes the sale of a business but it has to ensure that each party has the resources to move on. It may therefore be the only solution if there is no other way of settling matters.
It will also take a dim view of those who try and hide assets or appear to have gifted them away or liquidated them at a lower value ahead of a divorce. If you do this you may face cost penalties and the court can reverse the transaction. If you fear your spouse may be behaving in this manner early advice is crucial.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.
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