Relationship breakdown for co-owners of a family business

Married business owners – what happens on divorce or dissolution of a civil partnership?

If they are married or have entered into a civil partnership, the family court will consider all the resources available to the couple, including the business. It will award a fair and reasonable financial settlement depending on that family’s circumstances at the time of the divorce.

Specifically, the court will assess how the shares (or partnership interests) in the business are held, and what documentation there may or may not be regulating what should happen in the event of a dispute. For example:

• do the articles make provision for compulsory transfers of shares from one owner to the other in the event of relationship breakdown?
• is there any provision for valuing a shareholding?
• what are the parties’ future plans for the business?

Is it realistic to expect both parties to continue to work together in the business? In most cases it is unlikely that both parties will continue, and so arrangements need to be made for a sale of the business or for one of the owners to exit.

However, if they wish to continue their joint business venture, what additional protection might be required in the event of a future dispute?

At that point, revisions to the articles or the preparation or review of a shareholders agreement or partnership deed might be discussed, together with directors’ service/employment contracts, if not already in place.

As a corporate vehicle, a limited company is a separate legal entity to that of its owners, and on divorce or dissolution the family court will generally respect the express terms of any articles/shareholders agreement. However, if the business is solely owned by the parties, transfers of interests could be made.

The underlying economic value of their respective shareholdings or partnership shares will still be taken into account when assessing the entirety of the resources available to distribute between the parties to achieve a fair settlement.

Income streams will also be factored in – will one party need to seek a new role/will the other see a rise in their own income/how will the business turnover adapt to the departure of a key individual?

Unmarried business owners – what happens on relationship breakdown?

If a couple are unmarried and their relationship breaks down, the law is very different. The family court does not have a wide discretion to order a fair settlement as it would on divorce.

Instead, assets and resources are divided in accordance with property and trust law, and so determined by ownership.

In the case of shares within a business, they would be regulated by the parties’ respective shareholdings, and in the case of a partnership, divided in accordance with partnership law principles.

In the event of a dispute, the commercial court could be called on to regulate matters in accordance with the governance documents (or lack of them).

If only one party held a shareholding/partnership share, they would retain that interest.

Again, we need to consider the parties’ future plans for the business. Is it realistic to expect both parties to continue to work together in the business?

In most cases it is unlikely that both of the parties will continue and so arrangements need to be made for a sale of the business or for one of the owners to exit.

With no provision to order maintenance to unmarried parties (unless via child support), any loss of income would not be compensated for unless negotiated.

However if they did wish to continue their joint business venture, the steps to bring governance documents up to date, as outlined above, should be taken.

Impact on the business

The impact of relationship breakdown on the couple who co-own the business should not be underestimated.

The key individuals may be distracted from their roles, and/or they or the businesses’ finance team may be engaged in a lengthy process with valuers/legal teams. There might be a considerable impact on plans the business may have for future growth.

As such, decisions may need to be taken to support the co-owner(s) through coaching or counselling to enable the business to function until its future is resolved.

If rash decisions are being proposed, consulting widely with the business’ support teams, (accountants/financial team and/or lawyers), may resolve issues but, if not, additional advice from family law professionals (including possible injunctive relief) may be required.