Why every family business should consider pre-nups - Boodle Hatfield

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28 Jul 2022

Why every family business should consider a ‘pre-nup-as-standard’ policy

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Over the past 50 years, sadly one third of marriages has ended in divorce in the UK.

With the likelihood of marital breakdown a very real possibility for many couples, it’s natural that in many cases, one or both of them might consider the value of a pre-nuptial agreement, especially if they bring an interest in an established family business to the union.

Although pre-nuptial agreements are not the natural language of love, they can be an essential part of pre-wedding planning, especially for those who own a family business, the commercial success of which could be at stake in the event of divorce proceedings. In fact, having these conversations early on can save further heartbreak down the line and even create a foundation of open communication for couples before they embark on marriage.

Though pre-nups are becoming ever more commonplace – they are none the less still a difficult subject to raise. What makes these agreements so vital for family businesses and how can couples navigate these tough conversations sensitively?

An essential protection for a family business

With more people marrying later and building wealth and creating families prior to a marriage that they would like to protect; the rate of divorce sadly rising; and the system of a pre-nup being more commonly accepted in countries around the world, it is no surprise that pre-nups are increasingly becoming the norm for engaged couples in the UK.

For couples that have a stake in a family business, this process is vital – offering a number of reassurances for the couple and their wider families. Primarily, it allows couples to attempt to avoid the emotional and financial expense which is often associated with the separation of assets in the event of divorce, when often communication has already broken down. As a result, couples can have a calmer discussion about a fair resolution and, if divorce does occur, pre-nups ought to allow both parties to walk away from the marriage with the knowledge that they will both be financially supported and protected going forward.

Furthermore, those in a family business can use a nuptial agreement to protect the financial interests of their family members too, for example children from a previous relationship, and can also protect the business from the risk of an ex-spouse acquiring shares in the company following a divorce without a nuptial agreement. This allows family businesses to remain in control of their future.

As well as supporting a family business in maintaining the power over its future, a pre-nuptial agreement empowers the couple to come to decisions about their assets without these being imposed upon them by the Family Court following divorce. Pre-nups offer each party the power to decide how assets are divided and also provides financial saving by seeking to avoid contested proceedings at a later date.

A tool to avoid unwanted media attention

For family businesses that want to avoid media attention, pre-nups can also incorporate provisions to seek to deal with the financial consequences of divorce privately and away from the public eye. A pre-disclosure confidentiality agreement can form part of the pre-nup process too, safeguarding any information that is disclosed about the wealth and structure of the family business. For family businesses that are concerned about their privacy, pre-nups are a must!

How to sensitively pop the pre-nup question

It’s clear that a pre-nup is a wise decision if you’re running a family business, but when it comes to the practicality of asking a future spouse, this can be a very tricky conversation. It’s often viewed as a cold question in the run up to a wedding day, with most couples naturally not wanting to plan for their divorce just yet.

From our experience, it does not need to be an emotional discussion, and it is one that often works best when the agreement is presented as a norm established as part of sensible business planning. If it is understood that the agreement is a standard family-wide protocol that has been put in place by a family office, founding shareholder parents or trustees long before the relationship even began, it is often a more palatable conversation to have.

The risks of proceeding without a pre-nup

Forward planning can protect the business, and minimise damage to personal relationships

While the prospect of raising the subject of a pre-nup can be daunting, the reality is that the consequences of not having one can be much more severe. Failing to consider the impact of a marital breakdown on a family business can result in long, expensive litigation. It could even de-stabilise a business; damage relationships between family members; lead to shares being transferred; or in the worst case, result in an enforced sale. Planning ahead, therefore, gives families the very best chance of coming through a divorce unscathed.

The process of a ‘good’ pre-nup

Once the question has been asked, then comes the process of ensuring the pre-nup is upheld by a Family Court in the event of divorce.

Firstly, a pre-nup must provide fair support for the financially weaker party. This prevents the financially stronger party from ring-fencing the entirety of their assets in their own name ahead of divorce if that would deny their future ex-spouse of financial support. Assets that may be inherited upon a parent’s death need to be disclosed in addition to disclosing details of existing wealth, but only in as much detail as is known by that party at the time of entering the pre-nup.

When entering these proceedings, each party should also be supported by a solicitor who has had experience with pre-nuptial agreements, to demonstrate to the Court that both parties are aware of the nature and effect of the document that they are agreeing to and know the rights they may be surrendering. This will ensure they have the best support when navigating the process. Without this support, English Family Courts can consider departing from the terms of a pre-nup on divorce if it determines that one party was taken advantage of when entering the legal agreement.

If all these steps are followed, then the English Family Court should give effect to a pre-nup. And as the saying goes, “By failing to prepare, you are preparing to fail”, so it’s crucial to sensitively embark on a pre-nup before wedding bells toll.

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A legacy intact. Safeguarding your family business in the event of divorce,

To find out more about how to protect your family business in the event of divorce, Boodle Hatfield has recently published, A legacy intact: safeguarding your family business in the event of divorce, as part of a programme of publications we have scheduled to mark the firm’s 300th anniversary. The guide details all you need to know to maintain your business’s commercial success.

Find out more.