If divorce is a stressful time for families, it's stressful too for family businesses. The impact of court orders can be severe.
English divorces start from the principle that wealth should be divided equally between husband and wife. For many directors of family businesses, the company will be one of the biggest assets at stake; and a division of shares, or an extraction of cash, can seriously damage its health.
You need to know five home truths.
- The fact that an asset may be held within a company does not necessarily offer protection. It will usually mean that the asset itself cannot be transferred out of the company in a divorce. However, the husband or wife's shares in that company are an asset, will be valued, and can be transferred. Even if the court chooses not to go that far, it can weigh the value of the shares on one side of the balance sheet and order substantial non-company assets to be paid to the other spouse to make up the difference.
- Judges want to preserve companies as going concerns if they can. They know that many businesses will not have liquid assets at the ready. But, in the final analysis, they will make sure that husbands and wives have enough on divorce to meet their financial needs. They will look at whether businesses have assets which can be sold or leveraged to release capital. As a last resort, they may force a sale if it is the only way to meet those needs.
- To perform that analysis, directors should expect detailed scrutiny of an unaccustomed and unwelcome kind. First, a husband or wife will be expected to disclose documents in their possession or control concerning the assets, liabilities and financial health of the business (and which go far beyond publicly-available information at Companies House). Second, for valuable businesses a forensic accountant may be instructed to cast his eye over the books, interview key personnel, and come up with a market valuation. (All this intrusion is quite apart from the time lost to the business by husbands and wives, in emotional distress, concentrating on the fine detail of the case itself.)
- As a result, sensitive financial information may be disseminated to a wide number of professionals. The spouses themselves are not allowed to publicise that information outside the proceedings; they are under a duty to maintain strict confidentiality. But that might need to be policed. In any case, this dissemination can cause particular problems if the information is price-sensitive and "inside information" for the purposes of the criminal law. Separate legal advice may be required on what to disclose, how, when and to whom.
- All this said, there is an increasing acceptance by the divorce courts that spouses are entitled to and should exercise their rights as directors and shareholders consistent with their duties to the companies. Companies are independent entities, with rights and obligations of their own. They should not be treated as a mere alter ego of family members (even if owned and run by one spouse alone).
If this is a concern, turn back to the first in our series to find out how pre-nuptial agreements can help address the problem.
If you require further information on anything covered in this briefing please contact Nicholas Bennett (firstname.lastname@example.org , 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