Divorce is often considered to be a two-fold process. Primarily, the marriage is brought to an end legally, and secondly, the parties separate their finances.
Where the parties are involved in a family business, the second element can become particularly complex.
What counts as a family business?
A company will generally be considered to be a family business where the following apply-
- the family owns a majority of the voting shares or effectively control the business;
- one or more family members (or their spouses) are involved in the management of the business; and,
- more than one generation is, or will in future become, involved in the business.
It may be that you and your spouse hold equal shares in a company, but only one of you is involved in its operation. Alternatively, it may be that one spouse is a shareholder of the family business alongside their mother, father and siblings. The appropriate financial settlement on divorce will depend on the specific facts and circumstances.
What can be done to protect the family business?
Taking steps to protect a family business prior to divorce is most definitely advisable. While there are a number of potential avenues to consider, one popular option is to enter into a nuptial agreement, ideally prior to or, if not, following a marriage. While nuptial agreements are not legally binding in the UK, the courts should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications, unless in the circumstances prevailing it mean that it would not be fair to hold the parties to their agreement. Nuptial agreements are usually best considered as insurance policies; hopefully they will be unnecessary but offering each party a certain level of certainty and protection if they do get divorced.
An example of a situation where a nuptial agreement may be appropriate is where one party owns shares in a family business, which they acquired prior to meeting their spouse. To protect the family business, and thus the interests of any other family members that may also be involved, they may wish to enter into a pre-nuptial agreement before marriage to limit the potential for any claims that their future spouse may have in relation to the business if the couple divorce further down the line.
Parents who are planning to gift their adult children shares in the family business may also wish to consider adding a term to a shareholder agreement requiring their children to enter into a pre-nuptial agreement prior to any marriage, so to protect the family business.
Shares
In financial remedy proceedings on divorce, where one or both parties to a marriage are shareholders, the court will first seek to establish the value of each party’s interest. This may involve the shareholding being valued by a forensic accountant acting as a single joint expert. The valuation may also consider what, if any, discounts should be applied to the values to take into account to what extent an assert is illiquid and cannot easily be sold or converted into cash.
With family businesses, often a key consideration will be whether the business should be considered ‘matrimonial’ or ‘non-matrimonial’ property.
Where there is a divorce, the starting point will usually be that the parties should share equally in all matrimonial property built up during the marriage. In a case where the spouses are joint shareholders of a business that was founded and has grown considerably during the marriage, the business will most likely be considered matrimonial property and the value of that business should be shared. How the court chooses to provide for this will depend on the specific facts of the case. In most cases, the court will be conscious that most parties do not want ongoing financial and business ties post-divorce and so will need to consider how the value of the business may be shared, perhaps by one party keeping more of the non-business assets that are available to a similar value.
Where a clean break is possible, the court could therefore order a transfer of shares from one party to the other, with the value being offset by other assets or payments from one spouse to the other.
In contrast, parties may have much more limited claims to share equally in a family business which is considered to be a non-matrimonial asset. A family business might be considered to be a non-matrimonial asset in the following circumstances: -
- the business, or the party’s interest in it, was established or acquired prior to the marriage;
- the business was inherited by one of the parties; and/or
- the business has grown significantly post-separation.
However, whether the business is ‘non-matrimonial’ will depend on the entire facts of the case and the existence of one of the features above is not in itself determinative of being non-matrimonial property.
In circumstances where the court may be satisfied that a business is a non-matrimonial asset, where there are enough matrimonial assets to meet the needs of both parties and any children the court will be reluctant to make an order in relation to a family business that is non-matrimonial property. However, if there are not enough matrimonial assets to meet the needs of both parties and the children, the court may not be prepared to ignore the value of the business if another key factor (such as the financial needs of the parties / children) requires it to be taken into account notwithstanding it’s ‘non-matrimonial’ status.
Can the business dealings be settled out of court?
In many cases, parties may wish to settle their financial affairs on divorce between themselves. Provided this can be agreed fairly the parties have the freedom to do so. The court will not prescribe how finances should be split if a just and fair agreement has been reached and agreed by the parties and the court is satisfied that this is within the reasonable range of potential outcomes.
Parties should therefore take specialist advice in respect of how financial matters involving a family business may be resolved and how best to ensure that this is properly implemented and finalised with the appropriate documentation.
Where such an agreement is reached, it is advisable to have this agreement formally drafted and placed before the court in the form of a consent order. The court can then approve this order and give the parties financial certainty in that all financial claims have been dealt with. This will ensure that the financial settlement is final and neither party can bring claims against the other for financial remedy on divorce in the future. If an agreement is not approved by the court, either party may be able to apply to the court for a financial order in the future and could potentially do so years after the divorce itself has been finalised.
