According to the latest figures from ONS there were over 103,000 divorces in England and Wales in 2020, a slight fall on 2019.
The vast majority of these splits don’t make the headlines. But those that do have helped London gain a reputation as ‘the divorce capital of the world’, with a string of high profile, high-value divorce settlements taking place here. These include that of Princess Haya and Sheikh Mohammed of Dubai last year, in which an English judge ordered the Sheikh to pay £554 million in a settlement to his ex-wife – at the time hailed as the largest divorce settlement ever agreed in the UK.
So why is London the ‘divorce capital’ – and why does it matter for the owners of family businesses?
There are a number of factors which have helped London attain the ‘divorce capital’ title: the fact that in England and Wales judges have more discretion than in many other jurisdictions, that here the system favours the financially weaker party by taking as its starting point a 50/50 split of assets, and that the Court treats homemakers and breadwinners equally.
It’s important that family business owners understand this context because for them, divorce is not only life-changing on a personal level, it can also be cataclysmic for the future of the business.
In our experience, some family business owners are unaware of the scale of the risk they face in this regard. Here, we set out exactly what’s at stake as we outline the extent of the Court’s powers to make financial orders and explain how it approaches dividing assets in a divorce.
What’s at risk? What can financial orders cover?
When it comes to the split of assets between divorcing parties, the law in England and Wales provides for very generous awards to the financially weaker party on divorce.
The Court has wide-ranging powers to make financial orders that require the payment of lump sums or a series of lump sums, the sale or transfer of property, the sale or transfer of shares or pensions, as well as maintenance for one spouse and/or for children.
All assets will be on the table, not just matrimonial assets: English family law judges have the discretion to re-distribute assets between spouses even if they were brought into the marriage by one party or were inherited or gifted by one party’s family.
Where one or both spouses own shares in a family business, these will be considered as a financial resource and will be taken into account as part of the financial proceedings – meaning there is no guarantee the business will survive a divorce intact.
Many business owners are surprised to learn that the Court’s powers also extend to assets outside of this country, encompassing a spouse’s worldwide wealth.
How does the Court approach dividing assets in a divorce? What does this mean for business-owning families?
As we’ve covered – here in the ‘divorce capital’ – the Court’s starting point, wherever assets are greater than the parties’ needs, is a 50:50 division.
From here, it will consider a number of factors when examining a couple’s assets including with respect to shareholdings in family businesses…
- The nature of the shareholding. Essentially the question here is whether the asset can be treated as non-matrimonial and therefore be excluded from the matrimonial pot – if this is the case, the ultimate order may depart from the typical 50:50 split. Family businesses owners should be aware that it is only in ‘big money’ cases, where the assets under consideration go far beyond meeting the needs of both parties, that arguments about the non-matrimonial nature of an asset come into play. Assets that could be considered as ‘non-matrimonial’ include dynastic shareholdings, for example, those inherited by one spouse or put in trust before marriage, as opposed to a recently acquired shareholding or one built up during the marriage. A spouse is more likely to successfully argue an asset is non-matrimonial if it has been kept separate and not mingled with matrimonial assets.
- The duration of a marriage. The longer the relationship, the more likely a strict 50:50 split will be decided. This is particularly the case if, for example, one shareholder spouse has worked in the family business throughout the long marriage. The non-shareholder spouse is likely to argue that he/she has contributed to the increase in value of any shareholding by supporting the shareholder spouse in their endeavours over the years.
- Income stream and standard of living. Family business owners should be prepared for the Court to look closely at their standard of living. The Court will use this as a benchmark to determine what each spouse will need in future. It will want to understand whether the family has drawn income from its shareholding – to help it take a view on future sources of income, and importantly whether a forced sale of shares would be detrimental to that income.
- Personal assets. The Court will look closely at the personal assets of a family business shareholder – and though it will look at any form of practical method of meeting a departing spouse’s needs from alternative resources – it can and will contemplate a sale of shares if necessary.
- The Court will examine how value can be extracted from the family business. If it can be done via dividends which are in turn paid as lump sums to the other spouse, then there is far less likelihood of a transfer of shares. The Court can, if it needs to, order the sale of shares – but not underlying assets owned by the business (such as an investment property).
- Potential for a clean break. Business owners should understand that if at all possible, the Family Court will favour a solution which allows both parties a clean break and complete financial severance from one another. It does not like to order a transfer of shares by one spouse to another in private family companies where the result can then be to have both individual’s wealth tied up in one company, where one party is still involved in management. This can happen though if it’s the only option to avoid a sale and there are no other assets available to achieve a fair outcome.
Knowing the risks of divorce, family businesses can work to mitigate them
It’s clear then that family businesses are exposed to significant risk should the worst happen and a relationship breaks down – but there are ways to mitigate these risks.As a firm, we have had the privilege of working closely with family businesses over many generations. We regularly advise them on the legal protections that can shield them in these situations and safeguard their future.