When love gets in the way of business: how to advise family businesses in protecting themselves from divorce
Divorce is renowned for being one of the most stressful life events that an individual can face.
When a divorce involves a family business, this stress is often magnified given that it can result in other family members becoming embroiled in proceedings. This issue, if not carefully handled, can be cataclysmic for family businesses as well as heart-wrenching for the individuals involved. Sensible governance and succession planning is vital to any business – but particularly so for family-owned enterprises where communication between shareholders has an added emotional dimension.
Financial advisers must be live to the fact that family-owned enterprises derive great advantages from the nature of their ownership, but they also face unique risks and challenges that are specific only to them. The scale of such risk is often not well understood by business owners – particularly those in the early stages of building their legacy. Many underestimate the extent of the English Family Court’s powers. Not only do divorce proceedings lead to an individual’s financial position being scrutinised in great detail, but that of the company as a whole is likely to be put under the spotlight. Once the financial position is established, the Court has wide discretion to make orders in relation to an individual’s worldwide wealth. This includes in relation to shares in a family business. For example, the Court has the capability to order that such shares ought to be transferred to their ex-spouse or sold. Whilst the Court recognises that it is ultimately desirable to keep such shares intact, there are circumstances in which it may be simply unavoidable to make these orders. This is likely to be a business owner’s nightmare given that their primary aim may well be to preserve the value in that company for lineal descendants.
The start point in this country for the division of assets on divorce is one of equality, hence London’s reputation as being ‘the divorce capital of the world’. However, a 50/50 outcome is not the end point and arguments can be advanced to depart from that, such as an asset being acquired before the marriage (e.g. a business which was established well before the relationship) or being ‘non-marital’ (e.g. shares being gifted or inherited during the marriage by a family member and kept separate throughout the marriage). Financial advisers should remember that whilst these sorts of assertions ought to mitigate risk for family-owned companies, they do not provide guaranteed protection. The English Family Court will not hesitate to ‘invade’ non-marital assets if the marital pot does not meet the other spouse’s needs on divorce. Equally, if the Court can be persuaded that the value of the shares in a family business has increased during a marriage due to one (or both) spouse’s endeavours, the non-shareholder spouse may well be successful in securing an outcome which recognises the increase in value of those shares as ‘marital’ and therefore capable of being shared. In such circumstances, the Court may well make assumptions as to the liquidity within the company to make dividend distributions to the shareholder spouse over a certain period to buy out the non-shareholder spouse’s interest. That could have extensive ramifications for the company as a whole with respect to its cash-flow and future decision making.
As is clear, ‘love’ and ‘business’ are closely intertwined. The best advice is that careful planning, open conversations at an early stage and informed guidance are vital to seek to ensure that a family legacy can remain intact, even in the event of a break up. There are a number of asset protection measures that can be advised to business owners well in advance of a potential marital breakdown in a bid to minimise exposure on divorce. For example, although pre-nuptial agreements are not the natural language of love, a properly constructed pre-nup ought to be an essential part of pre-wedding planning, especially for those who own a family business. Sowing the seeds around family governance and having these difficult conversations early with the next generation can save further heartbreak down the line and even create a foundation of open communication for couples before they embark on marriage and life together as future successors of an established family enterprise.
Pre-nuptial agreements are not automatically binding in England but have a strong chance of being respected by the Court if they are entered into properly. This includes each party having independent advice on the nature and effect of the document; providing full and frank disclosure at the time; and not being put under pressure to sign. Crucially, a pre-nup also must be ‘fair’ to the financially weaker spouse. Whilst this often means that some financial provision is required in the pre-nup, it certainly ought to enable shareholder spouses in most scenarios to seek to protect the underlying value of their shares in any family-owned company. A pre-nup also ought to avoid a very public battle through the Courts under the media spotlight which could seriously damage the reputation of a business.
‘Hope for the best and plan for the worst’ is certainly a wise message for those advising family business owners in a bid to preserve the legacy of an enterprise that they have no doubt worked so hard to build.
This article was first published in IFA Magazine in September 2022.