Briefing

Pre-nuptial agreements and the family business

Posted by: Nicholas Bennett | Date posted : 02/11/2016

A wedding day is, of course, a time for celebration. But for family businesses (even the happiest), it may not be free from nerves: what does the acquisition of a new son- or daughter-in-law mean for the firm?

The particular impact of divorce will be covered in the second in our series. Here we concentrate on how to nip the problem in the bud. A pre-nuptial agreement is now a common form of protection for business-owners, negotiated at the same time as the seating plan, the flowers and the in-laws. Family wealth can be specified, ring-fenced and protected from divorce claims. A shareholding, or a dividend stream, can be kept separate from other assets and put to one side.

Our case in the Supreme Court in 2010, Radmacher v. Granatino, is the leading legal authority. To quote from the judgment, English courts will uphold pre-nuptial agreements which have been "freely entered into ... with a full appreciation of [their] implications unless in the circumstances prevailing it would not be fair" to do so. But that leaves some open questions: when, exactly, would it not be fair?

Here are four rules of thumb.

  1. The agreement must be "freely entered into". It must be signed without any undue pressure being brought to bear on either party. To avoid any suggestion of this, there should be proper time for negotiation and discussion; and a reasonable delay between signing the agreement and the wedding itself.
  2. Each party must have "a full appreciation of the implications of the agreement". They must understand the rights that it creates or removes. Part of this involves understanding, in broad terms, the financial resources that the other party has. This means there should be broad disclosure of financial information, the opportunity to ask questions, and independent legal advice from specialist lawyers.
  3. In broad terms, the Supreme Court agreed that it might very well be fair to exclude claims against pre-acquired or inherited wealth. Family money can, within reason, be ring-fenced and kept safe. But it will not be fair to leave a party in a "predicament of real need". An agreement which leaves one party penniless on divorce, and the other rich, will not find favour. In almost all cases, a court will expect a party's needs for housing and income to be met if he or she cannot do so from his own existing resources. Agreements need careful tailoring to ensure that this happens.
  4. Whatever the terms of any agreement about the parties' own financial affairs, the court will retain a free hand to make financial orders for children. This obviously includes child maintenance payments, but could also mean a housing fund (where one spouse effectively lends the other money to put a roof over the children's head until they reach adulthood).

Before the young managing director walks down the aisle, he or she should follow these rules; have a pre-nuptial agreement signed; and then breathe a sigh of relief. A carefully-drafted agreement makes good business sense.

If you require further information on anything covered in this briefing please contact Nicholas Bennett (nicholas.bennett@farrer.co.uk , 020 3375 7103) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Family Businesses page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, November 2016