Protecting your business from a divorce

A divorce can force an owner managed company to break up, with painful consequences not just for the shareholders and directors directly involved.

In addition, dividing up a business in a divorce can be costly and stressful.

This Briefing examines steps that can be taken to avoid such outcomes and mitigate damage.

Below are five key things that business owners should consider to protect their business from a future divorce.

1. Make sure your pre-nuptial explicitly ring-fences your shares in your business

Whilst pre- and post-nuptial agreements are not automatically binding in this country, there is a good chance that they will be upheld by the Court if they are entered into properly.

If you own shares in a company and have successfully built up the business prior to getting married, it’s vital that you have a pre-nuptial agreement.

The pre-nup should explicitly ring-fence the shares in the business as your separate property. This should provide the shares with some protection from forming part of the marital assets to be divided on divorce.

If you are already married, it may not be too late. You could try to secure a post-nuptial agreement with your spouse to achieve the same goal.

It is often more difficult for the financially weaker spouse to argue that they were under pressure to sign a post-nuptial agreement and that they should not be held to its terms compared to a pre-nuptial agreement which is signed in the lead up to a wedding.

2. Don’t make your spouse a shareholder of your business without careful consideration

It is common in owner/managed companies to make spouses shareholders to take advantage of their tax allowances etc.

However, this should not be done without careful consideration as to what may happen in the event of divorce.

Before you get married, review your company’s shareholder agreement if you have one. If you don’t then it may be a good idea to put one in place. It is wise to include what is known as a ‘pre-emption clause’, which means spouses cannot receive shares in the business without existing shareholders having the opportunity to purchase them first.

Making your spouse a shareholder of your business can make a divorce much more complex and financially painful to settle. For example, your spouse could claim that something you have done has damaged the value of their shareholding. You could find yourself fighting two separate cases against them at the same time – your divorce, and another more complex and expensive corporate law claim.

It is sometimes not possible to buy out your spouse from a shareholding in your business, due to a lack of cash. In a worst-case scenario, your ex-spouse could convince a judge that your mishandling of the business means they should be able to nominate a director to the board to protect their ongoing shareholding post-divorce. The need to get approval from your ex-spouse’s representative for major business decisions could make the running your business extremely difficult.

3. Consider carefully before putting them on the payroll

If your spouse is also an employee of your business, the potential acrimony of a divorce could make it virtually impossible to keep them working with you. Having to terminate your spouse’s employment opens up employment claims as another potential issue in your divorce.

In addition, your spouse could also argue that as a key employee, they were responsible for the business’s success, and that they are entitled to more of its value than they might ordinarily receive.

4. Don’t have unnecessarily high levels of cash in your business

Carrying unnecessarily high levels of cash on your company’s balance sheet makes it easy for a judge to order it to be paid to your ex-spouse in a divorce settlement. Whilst the Court is reluctant to order a spouse to sell his or her business as a consequence of a divorce, it may order that the business owner makes lump sum payments to their spouse to buy out their interest in the company.

5. Bring in your children as shareholders to protect the business from being broken up

If you are the only shareholder in your business, a judge may order you to sell it or some of its assets to settle your divorce. This is because you would be the only person affected by the sale.

However, if there are other shareholders, judges may be more inclined to seek to avoid ordering a business to be sold if possible, as it would be unfair to affect other shareholders in the business when they are not involved in the divorce.

If you are the sole shareholder, a particularly effective way of protecting a business is to bring forward plans to gift or transfer shares to your children. The Courts in most circumstances do their best to protect family businesses and try their best to avoid having to break them up. Entrepreneurs could consider bringing their children in as shareholders from early adulthood.

For more information on the matters discussed in this Briefing or for advice in connection with any matters relating to Divorce please contact Tariq Ahmad on 01279 713812 or email tariqahmad@pellys.co.uk.

For more information on business matters and how to protect your shareholding generally please contact Richard Murrall on 01462 419917 or email richardmurrall@pellys.co.uk.