How to protect family businesses in the event of divorce

Did you know that over 42% of marriages end in divorce and costs the British economy £46 billion every year?

SMEs and family businesses can be directly affected by their key personnel’s family breakdown. They may be absent from work or simply take their eye off the ball. The business can become the subject of financial negotiations, at the very least requiring financial information to be disclosed or for the business to be valued and, in some cases, the court can order that shares are transferred or sold.

What can be done to limit the impact in practice? We’ll go over our top 10 tips below.

Divorce proof your company

This is crucial at all stages of the business lifecycle. Ensure the company articles contain pre-emption rights to stop the courts transferring shares to your ex. Also, make sure there is a shareholders’ agreement which requires all shareholders to have nuptial agreements and then make sure that they actually do it in practice.

Ideally, shareholders will have a prenuptial agreement to ensure that any potential claims are limited before the marriage is entered in to but it is never too late to enter into a nuptial agreement so think about postnuptial agreements too. Any agreement should then be kept under review, as circumstances change, to ensure they remain fair and more likely to be upheld by the court.

Businesses can still be at risk if you are not married

Unmarried couples don’t have the same financial claims as spouses upon divorce. So, if you are not married, your partner cannot claim a share of your assets, and your business assets are in theory protected.

However, an ex may argue that they have a beneficial interest in the business, even if they are not named as legal owners. So, it’s equally important to have a clearly written cohabitation agreement, to clarify who owns what and what would happen in the event of a relationship breakdown, and to have a shareholders’ agreement and the necessary articles in place as appropriate.

Do you really need to involve your partner?

For many valid reasons, business owners often employ their partners in their business, but rarely consider what would happen if they were to split. Upon relationship breakdown it’s possible that not only will there be a hostile atmosphere in the workplace (as well as at home), but the potential for employment claims being brought by your ex and other employees if the situation isn’t managed properly. Your ex may also be more likely to be able to claim a value in the business is they have been directly involved in it.

Take advice early

In the event of a separation, take advice from a specialist family lawyer who understands businesses at an early stage to understand the company’s exposure to risk in the specific circumstances.

This tip is hopefully self-explanatory. Once you know what the legal position is in relation to the business you can take whatever steps are available to limit the impact. These steps may include any of the following tips.

Teamwork is key

Think innovatively and work with your family solicitor, accountant, corporate advisors, etc. A joined-up process should lead to huge rewards and an opportunity to plan properly as you move forward. ​

Get the Finance Director / company accountant on board (and keep them sweet)

The company’s Finance Director or accountant should be ready to spend some time with any accountant who has been appointed on a single or joint basis to report on the business for court purposes. Information and documentation requests are likely to be substantial, and it is usually better to co-operate as much as possible to ensure that the court and the other party have what they need to understand properly the business in question.

Avoid court if possible…

The court is a blunt instrument and not one well suited to consider something as complex as a business. Your assigned judge may be a children law specialist or a part-time judge working in an altogether different discipline. There is no guarantee on outcome. It’s slow (1 – 2 years to conclude even a simple case), expensive (with lawyers appointed throughout that time having to field questions from the other solicitor, and having to repeatedly update financial disclosure, etc.) and not necessarily confidential (business discussions in ear shot of other court users, the press being present in court, and/or the risk of having your case judgement published for the world to read).

We would recommend engaging in non-court dispute resolution processes instead, which brings us to the next tips.

Mediate or collaborate

Working together is the best way to take into account wider considerations such as tax implications or succession planning for any children. Consider mediation (with or without your lawyers) or collaborative law as a way to sit around the table and explore all options. This will also enable you to move forward at a pace that is right for you and the business, as well as ensuring that you retain control over the ultimate outcome rather than handing over the decision making to a third party who knows nothing about you nor your business in practice.

Arbitrate if necessary

If you are unable to reach an agreement for any reason, arbitration is an alternative to court and one many business owners will already be accustomed to in the commercial sphere. There are still predictability issues, but the benefits are:

• Speed, flexibility and the ability to timetable the process around busy people. Stages can be dealt with on paper to avoid hearings where appropriate.
• There will be costs savings through not having lawyers engaged for as long!
• Confidentiality. Set the arbitration up in a solicitor’s office (or elsewhere) with break out rooms for those more confidential discussions.
• You can choose your ‘judge’ – you can select a family law arbitrator with a strong commercial background.
• Appetite for innovation. An arbitrator who understands what is being proposed is far more likely to structure their ‘award’ around detailed planning than a judge

​Support your colleagues

Separation and divorce are among the most stressful life events. Uncertainty about the future, a rollercoaster of emotions and fears about not seeing children are unlikely to mean that the day job has the full attention that it needs.

Review what your company can do to support your colleagues/employees, whether that is referral to a company paid counselling service, time off or a reduced workload.

So here you have it. With these tips you should be able to limit the impact of divorce on your family business. If you need assistance from our family lawyers, speak to our team today.