This article covers some key points you should consider for protecting your family business against divorce and associated employment claims.
Everyone knows that running your own business can be a very stressful thing to do, especially during a pandemic. It is best to be prepared for all possibilities.
Protecting your family business from divorce
It is very common for spouses to be shareholders in a family business, often for tax reasons, but as we all know, sadly almost 50% of all marriages end in divorce. This means that there are many factors to consider as a business owner, should matrimonial difficulties occur.
The simple message is to take early legal and accountancy evidence or rue the day that you didn’t.
How pre and post-nuptial agreements can help with protecting your family business
Let’s start with the pre-marriage position and the importance of having a pre-nuptial agreement in place to protect the family business. These are now highly likely to be upheld by a divorce court should the marriage fail and are relatively simple and cheap to put in place. Both spouses would need to take separate legal advice, and there are various criteria that must be met, but all of this is easy and cost effective.
If family assets or shareholdings are to be transferred to spouses, say by the older generation as part of tax planning, a post-nuptial agreement can also be effected to protect those assets on divorce from leaving the family that gifted them.
We are highly experienced in preparing both pre and post-nuptial agreements (and connected shareholder agreements) and this is now a vital consideration pre-marriage or on the transfer of assets. You can read more about nuptial agreements here.
What to do if the marriage breaks down
Where both spouses have an interest in the business (whether equal or unequal), it is vitally important to take early advice in the unfortunate case of marriage breakdown.
We advise you to act carefully, no matter how high emotions are flying. It is so common for the person running a family business to feel overwhelmed with fear that their business may be taken from them if a divorce takes place. In fact, it is extremely rare for a business to be sold in the event of divorce. The family courts understand that there is little to be achieved by this and will be very keen to preserve the business often for the benefit of the parties’ children.
Probably the most significant advice that could be given to a controlling shareholder or director facing their own divorce is to make no sudden moves without good advice. It is so tempting, and we have seen situations where the boss of a company has sacked their unfaithful spouse on the spot. Not only does this cause enormous acrimony but they are then potentially facing an unfair dismissal claim in an Employment Tribunal, a maintenance claim in a divorce court and very importantly may have lost valuable tax reliefs that would otherwise be available on the transfer of their spouses shares back to them in the subsequent settlement.
It is wise to make no changes to the corporate structure until clear legal and accountancy advice has been taken.
Employment law applies to family businesses too
It is important to remember that employee status and employment law rights apply to spouses employed in a business, regardless of the family relationship.
It is not uncommon for spouses to start raising potential employment claims as leverage to negotiate the terms of the divorce. We advise that a divorce financial court order confirms that financial settlement is full and final settlement of all claims, including employment law claims. If you are looking for a clean break (and to avoid the risk of future employment claims) then termination of employment should be agreed as part of the financial settlement.
How will divorce affect the family business?
Inevitably, if a divorce takes place, the business will be financially affected to some extent. Much depends on the length of the marriage and whether the departing spouse has shares or a partnership interest in the business.
The value of the business will usually be an issue that needs to be resolved; this is usually done by a jointly appointed accountant who is independent of the business accountant. Again, this very process can cause anxiety for the business owner but valuations done in this way tend to be very conservative as they are based on past performance. Issues such as the effects of the pandemic can be factored in if relevant, as well as further deductions made for latent tax liabilities and other costs.
Layered on top of this there are other considerations such as where a family business came from. If, for example, shares were gifted to one of the couple, it is possible that a divorce court would not necessarily take the full value of those shares into account as divisible in the divorce settlement. However this does depend on the other factors in the case.
In some cases we deal with, the couple wish to continue in business after divorce. This can be stressful but with the correct legal structures in place, such as a carefully drawn shareholders’ agreement, this is possible and may be desirable where neither party nor the Company can afford to finance the purchase of the other party’s shares.
Such arrangements are relatively rare as most business owners want to obtain a clean break and finality so they are free to make their own business decisions in the future.
When faced with a marriage breakdown, the temptation as the worried and stressed business owner is often to work harder at the business and to focus on that rather than facing the upset and complication of a divorce. In fact, this is usually a mistake – doing this and delaying the resolution of matters can often just result in an increasing settlement figure as the value of the business goes up. Far better, with good legal and accountancy advice, to face up to the resolution of financial matters, reach a prompt and cost effective settlement, which enables a clean break and the business to continue afresh.
If you would like to discuss protecting your family business from divorce or employment claims, please get in touch.