Business assets on divorce or dissolution: steps to protect your business from a future divorce

In order to be successful in business, it is important to forward plan, pre-empt potential threats and put in place a strategic plan to deal with whatever may lie ahead. However, few business owners take time to consider the significant impact relationship breakdown can have on their business, whether as a result of their own marriage or relationship coming to an end, or that of a key player within the business. Indeed, the effects of relationship breakdown can be far reaching. Not only can they have a detrimental impact on productivity and cause short-term disruption, but they can often have a significant impact on any long-term plan for the business.

In this article, we look at how the family court will approach an interest in a business on relationship breakdown and, in particular, where one (or both) of the business owners are married or in a civil partnership. If the business owners are not married or in a civil partnership click here.

We will look at what steps can be taken to try and protect a business from relationship breakdown.

Will one or both parties’ interests in a business be taken into account by the family court?

On divorce or dissolution, an interest in a business will be taken into account as an asset available to one or both parties. See here.

The business will come under considerable scrutiny and, unless the parties are able to agree a figure in respect of its value, the court is likely to appoint a jointly instructed forensic accountant to provide a formal report. When preparing such a report, the accountant can not only provide an opinion as to the value of the shareholding of the divorcing shareholder(s), but they can also be asked to address additional matters such as the level of income the business is likely to generate moving forward, the tax consequences of the shares being sold or transferred, and any issues surrounding liquidity. See here.

Obtaining a detailed business valuation from a forensic accountant will involve an additional layer of costs and will undoubtedly result in delay and further business disruption. 

What steps can be taken to protect a business from divorce or civil partnership dissolution?

Governance documents

Often, when starting a business, limited, and regrettably insufficient, time and thought is given to governance documents. It is common for standard precedents to be adopted with little, if any, regard given to what might happen in the event of a dispute or claim, such as that arising on divorce or relationship breakdown. 

Yet, when assessing a financial settlement on divorce or dissolution, as a starting point the court will examine this documentation. It may be, for example, that the articles of association include provision for compulsory transfers of shares in the event of relationship breakdown. 

The good news is that it is never too late to review any governance documents and explore whether changes can be made to help protect the owners of the business from the possible pitfalls of relationship breakdown and regulate any arrangements. 

Ideally, a suite of governance documents, including bespoke director service/employment contracts, articles of association and shareholders agreement should clearly define the owners’ shareholdings, roles and obligations. Similarly, in the case of a partnership, a partnership agreement can include an express declaration of ownership. 

On the basis that a corporate vehicle is a separate legal entity to that of its owners, on divorce/dissolution the family court would generally respect the terms of any shareholders agreement/articles. See here. Unless there are unusual and compelling circumstances, the court will not normally order the transfer of legal ownership in contravention of the provisions recorded in a shareholders agreement or articles where there are third party co-shareholders with rights. That being said, if the parties are the sole shareholders, transfers of interest could still be made. 

Pre and post-nuptial agreements

Business owners should also consider a pre or post-nuptial agreement. Such an agreement can mirror corporate arrangements and set out in black and white the parties’ intentions with regard to an interest in a business in the event of relationship breakdown. It can add an extra layer of protection and help to limit the claims against the business.

By way of example, such an agreement can specify which parties should retain any shareholding or interest in a business on separation, and whether the other parties should receive additional capital by way of compensation for their loss of interest in a business. 

Although, as the current law stands, nuptial agreements are not legally binding in England and Wales, since the case of Radmacher v Granatino [2010] UKSC 42 the law has moved on and, provided the agreement is deemed to be fair to both parties and certain safeguards are complied with, the court is likely to attach significant weight to any pre or post-nuptial agreement if there were a future divorce, and parties can expect to be held to their terms. 

Keep arrangements under regular review

Businesses and relationships change with time, and it is important that business owners are alive to the potential impact relationship breakdown can have on their business, and that they pro-actively prepare for such an eventuality by regularly reviewing their governance documents and arrangements.  This is particularly important in family run businesses.