Relationship breakdown is an all too common feature of modern  society and the legal and financial issues which arise are often  complex, particularly where a family business is involved. Until recently,  divorce was rarely contemplated until it happened.  However, we  are increasingly seeing family business owners seeking ways to  minimise the damaging effects of a divorce within the family, much in  the same way that they plan for other possible eventualities such as  illness or death.  Similar principles also apply to the breakdown of civil  partnerships.

What happens to an interest in a family  business on divorce? 

All of a couple’s interests will be taken into account in determining  a financial settlement on divorce including any interest in a family  business, along with the other assets such as houses, pensions or  investments.

The first task is to establish the value of those interests.  Where  there is co-ownership of a business, particularly with other family  members, this is often a difficult and expensive issue to resolve and  discounts for minority interests and liquidity frequently become the  key issues.   Even experts brought in to assist will often disagree.   If an agreement cannot be reached ultimately a court may have to  impose an arbitrary decision.  

After considering value, the next stage is to decide what happens  to the assets, including any business interests.  In the absence  of agreement, a court would divide them to achieve what it  regarded as a fair settlement.  This is done by applying a series of  discretionary principles rather than fixed percentages or rules and  inevitably the outcome is difficult to predict.   

The court has wide ranging powers to redistribute assets as it sees  fit and the starting point is usually to achieve equality.  Although  a court will often look to protect a business, they can transfer a  spouse’s interest in it or make orders that require a spouse to  obtain a distribution of funds from it, or require the interest to be  sold.  The impact on the business can therefore be very significant.  

What can be done to protect the family  business? 

Various steps can be taken to limit a family business’ exposure to  a divorce.  The specific circumstances will determine which are  appropriate and in our experience any advice taken should be  across the board, combining asset protection with financial and  taxation advice to ensure that the steps being taken meet the  family’s objectives.  

Options include:

  • Pre or post nuptial agreements: It is possible for a couple  to enter into an agreement either before or after they marry  with the aim of protecting the family business, often by ringfencing any interest in the business from a financial settlement.  lthough these agreements are not currently absolutely binding, they are presumed to apply, provided they are done  properly.  The Law Commission has this year published a  report with draft legislation to elevate their status and if the  changes are accepted, it would mean that such agreements  could be contractually enforceable, provided that the couple’s  needs have already been met.  Even if the changes are not  accepted these proposals are likely to be influential. Case law  already shows the significant influence these agreements have  on divorce settlements. We are preparing more and more of  these agreements in conjunction with the passing on of shares  or business assets to the next generation.
  • Controlling the ownership of shares: Family shareholders  of a company can establish a policy that shares in the family  business can only be held by members of the original family,  not their spouses, and that if such shares are required to be  sold they must be offered to original family members only.  The company’s articles of association could also provide that  shares transferred to a spouse should be bought back by the  business in the event of a divorce.  The court will always retain  a discretion to make orders over any shareholding owned  by either of the divorcing couple but at the very least such  provisions may be influential.
  • Involving Trustees: Instead of transferring shares outright  to spouses or family members, consider transferring them to  trustees to hold for their benefit. This cannot be guaranteed to  take them out of account on divorce, but adds a further layer  between the interest in the family business and the divorcing  spouse and will make a claim by them that much harder. 
  • Not getting married or not entering into a Civil Partnership:  This is the greatest available protection, provided the spouse  or partner has no interest in the business themselves, as  cohabitants do not have the same rights as spouses. 

It is often possible to combine different steps to achieve greater  protection, but early advice is recommended in every case as the  options are reduced once a divorce is underway or imminent.