Good business sense: protecting the family business against divorce

Divorce can be a stressful time for the family business as well as for the divorcing parties themselves. The impact of court orders can be severe, making it all the more important to take protective steps early on.

How can divorce impact the family business?

The divorce court has extensive and wide-ranging powers to divide wealth equally between husband and wife. For many directors of family businesses, the company will be one of the biggest assets at stake.

Be warned:

1. Holding assets within a company does not necessarily offer protection. The company shares themselves are an asset, will be valued, and can be ordered to be transferred between divorcing spouses.
2. Judges will look to preserve companies as a going concern if they can but, as a last resort, they may force a sale if it is the only way to make sure that both parties have enough on divorce to meet their financial needs.
3. Directors should expect detailed scrutiny of company documents relating to assets, liabilities and the financial health of the business. 
4. As a result, sensitive financial information may be disseminated to a wide number of professionals, which may require separate legal advice.

How can the business be protected?

Pre-nuptial and post-nuptial agreements are now a common form of protection for business owners. They allow for a shareholding or a dividend stream to be specified, ring-fenced and protected from divorce claims, and can also provide much needed privacy (as those cases are less likely to be fought out in court).

What’s more, developments in case law demonstrate that the family court will give effect to such agreements unless it would not be fair to do so. But when would it not be fair?

Here are four rules of thumb:

1. There must not be any undue pressure on either party. You should allow 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”. In practical terms, there must be disclosure of financial information, the opportunity to ask questions and independent legal advice.
3. Whilst family money can, within reason, be ring-fenced, it will not be fair to leave a party in a “predicament of real need”. Agreements need careful tailoring to ensure that one party will not be left significantly worse off to the extent that they suffer hardship.
4. Whatever the terms of any agreement about the parties’ own financial affairs, the court will retain the ability to make financial orders for children.

There are extensive anti-avoidance measures in place to protect against the ring-fencing of assets directly prior to divorce proceedings, so it makes good business sense to put a carefully drafted agreement in place early on. Consider this part of a long-term precautionary strategy.

If you require further information about anything covered in this briefing, please contact Nicholas Bennett, or your usual contact at the firm on +44 (0)20 3375 7000.

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

© Farrer & Co LLP, June 2019