Protecting your business on divorce

There is no doubt that the one of the results of lockdown has been the pressure that it has put on families and relationships, and for some those pressures have become so intense that they have lead to separation or divorce.  The effect on the family of the financial fallout can be immense, but the effect upon a business can also be damaging and costly.

A divorce which involves a business can be complicated and needs to be handled by lawyers with specialist expertise in this area. A simple value of the shareholding may not be enough: there are many ways of valuing a business, depending on the type of business, the customer base, or the way that it interacts with its stakeholders.

For some company owners there will be tax implications if funds or shares are to be transferred out of the business, and money taken from a business to pay off a spouse can have serious consequences for cashflow and liquidity.  The business may have employees, and for some the spouse may him or herself  have been employed in the business, so the impact of the separation or divorce upon that person's income would be a factor that would feature in the negotiations to final settlement.   

Careful planning can help to minimise the effects of divorce upon a business.  You may want to consider the following:

Check your company documentation.  Are there any documents, procedures, even 'unwritten rules' that are not entirely clear, and which could be difficult to unpick? What are those procedures and principles that everyone takes for granted, but which would take some explaining if a separation was to occur?

If your spouse is a shareholder, would you be able to buy out his or her interest on separation?  What percentage of the shares does he or she have?  How could that affect decisions in the future?  What joint approach could be threatened if your relationship fell apart?  If you needed to re-finance the business before financial matters arising from the divorce were concluded would he or she cooperate?  Would a shareholder's agreement be a sensible way of avoiding problems in the future? Such an agreement could set out what would happen on separation or divorce, and deal with any restrictions on share transfers. It could even set out a method for valuing shares.

If you have secured business debts against family assets, for example the family home, then this could be a further complication to resolving the financial issues arising from divorce.  If you have used matrimonial monies to support the business then your spouse could have more of a stake than you would wish for in the business.  

Do you really need to employ your spouse? This is a common strategy for effective tax planning, but again, this could give him or her a higher stake in the business in terms of their contribution to its success.  In any event, once a relationship has broken down it will be difficult to continue that employment relationship.

Consider drawing up a pre-nuptial or post-nuptial agreement.  The Courts' will consider any such agreement if it is properly drawn, and whilst still not automatically binding on the Court it will provide a clearly documented and persuasive argument as to why the company assets should be ring-fenced and not subject to the sharing principle on divorce.  For those embarking on marriage and bringing a successful business into the marriage, this can be particularly important.

The role of the Family Court is to try to resolve financial matters arising from divorce in a way that is fair to all parties, and meets the needs of each party in accordance with the available assets.  The Court would always try to avoid a business sale, often because of the impact of that upon the income of the parties in the future, but sometimes that might be the only way to achieve a settlement.  Some people may feel that the way to avoid the disruption would be to liquidate assets, or hide them, or give them away.  This is inadvisable and could result in severe penalties being levied, for example costs awards and even reversals of any transactions that the Court felt had been made to try to dissipate assets.

For further information on any family law issue, please contact one of our specialist family law team, complete our online enquiry form, or contact your local office.

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