A divorce can force businesses to break up, with painful consequences not just for the parties directly involved. This article examine steps that can be taken to avoid such outcomes and mitigate damage.
Dividing up a business in a divorce can be costly and stressful. Partner, Emily Brand and Senior Associate, Katie O’Callaghan outline five key things you must do in advance to help protect your business from a future divorce.
1. Make sure your pre-nup explicitly ring-fences your shares in your business
Whilst pre- and post-nuptial agreements are not automatically binding in this country, there is a good chance that they will be upheld by the Court if they are entered into properly.
If you have already built a business prior to getting married, it’s vital that you have a pre-nuptial agreement. The pre-nup should explicitly ring-fence the shares in the business as your separate property. This ought to provide the shares with some protection from forming part of the marital assets to be divided on divorce.
If you are already married, it may not be too late. You could try to secure a post-nuptial agreement with your spouse to achieve the same goal. It’s often more difficult for the financially weaker spouse to argue that they were under pressure to sign a post-nuptial agreement and that they should not be held to its terms compared to a pre-nuptial agreement which is signed in the lead up to a wedding.
2. Don’t make your spouse a shareholder of your business without careful consideration
Before you get married, review your business’s shareholder agreement. It is wise to include what is known as a ‘pre-emption clause’, which means spouses cannot receive shares in the business without existing shareholders having the opportunity to purchase them first.
Making your spouse a shareholder of your business can make a divorce much more complex and financially painful to settle. For example, your ex could claim that something you have done has damaged the value of their shareholding. You could find yourself fighting two separate cases against them at the same time – your divorce, and another more complex and expensive corporate law claim.
It is sometimes not possible to buy out your spouse from a shareholding in your business, due to a lack of cash. In a worst-case scenario, your ex-spouse could convince a judge that your mishandling of the business means they should be able to nominate a director to the board to protect their ongoing shareholding post-divorce. The need to get approval from your ex-spouse’s representative for major business decisions could make running your business extremely difficult.
3. Also consider carefully before putting them on the payroll
If your spouse is also an employee of your business, the potential acrimony of a divorce could make it virtually impossible to keep them working with you. Having to terminate your spouse’s employment opens up employment law as another potential ‘front’ in your divorce.
In addition, your spouse could also argue that as a key employee, they were responsible for the business’s success, and that they are entitled to more of its value than they might ordinarily receive.
4. Don’t have unnecessarily high levels of cash in your business
Carrying unnecessarily high levels of cash on your company’s balance sheet makes it easy for a judge to order it to be paid to your ex-spouse in a divorce settlement. Whilst the Court is reluctant to order a spouse to sell his or her business as a consequence of a divorce, it may order that the business owner makes lump sum payments to their ex to buy out their interest in the company.
5. Bring in your children as shareholders to protect the business from being broken up
If you are the only shareholder in your business, a judge may order you to sell it or some of its assets to settle your divorce. This is because you would be the only person affected by the sale.
However, if there are other shareholders, judges may be more inclined to seek to avoid ordering a business to be sold if possible, as it would be unfair to affect their shares in the business when they are not involved in the divorce.
A particularly effective way of protecting a business is to bring forward plans to hand shares to your children. Courts have a particular respect for family businesses, and it does its best to avoid having to break them up. Entrepreneurs could consider bringing their children in as shareholders from early adulthood.
This article first appeared in Wealth Briefing on 13 August 2019.