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Separate ways

18 March 2015

Divorce-proofing a business is a sensible precaution, even if you never need to use it.

There are many difficulties that family businesses have to face in this current economic climate.  However, there can be few greater threats of upheaval to the family business than having to deal with the impact of a divorce or relationship breakdown in the family. Not only is there the obvious upset for the parties concerned, but it can also impact significantly on the other family members involved in the business. 

Liz Smithers, a partner at law firm Clarke Wilmott LLP, advises that any shareholding, or interest, that a husband or wife holds in a family business will be subject to the scrutiny of the court, and will be considered an asset available for distribution between the separating parties. “The court will want a valuation of the interest or shareholding, and to understand the liquidity of the business and the ability for monies to be extracted to satisfy the divorce settlement.  There can also be additional complications, such as the valuation of any land or buildings owned by the business or analysis of company pension schemes which, in some cases, can own the building from which the business trades.”

And matters can become even more complicated if both spouses play an active role in the business. If there is animosity as a result of the separation, this can have a negative impact on the running of the business.  This, in itself, can cause practical problems for the productivity of the business if there are disputes in the day-to-day decision-making process.

Practical steps

If the business has been established for some time, and the intention is for family succession, it is important that consideration is given to any impending marriage to ensure the business is protected in the event of a later separation. Practical considerations would involve thinking carefully about nominating any shares or interest to the incoming spouse. What might seem a good idea at the time may have serious consequences if the marriage does not last as long as the business.

Smithers also counsels that very careful thought should also be given before making the spouse a director, company secretary or employee. “Separations, unfortunately, are rarely without a degree of acrimony and a divorcing spouse who is pivotal to the business may cause disruption.”

Limited fall-out

Although not legally binding in the UK, pre- or post- nuptial agreements are now given great weight by the court as long as certain pre-conditions have been met. This follows a case in 2010 in which the Supreme Court upheld the appeal of a divorced wife, who had wanted to protect the wealth she had already inherited from her family. The Family Law Commission’s recommendations of February 2014 have also guided the court’s position.

“If agreement can be reached on how the business would be treated in the event of a separation, it can assist greatly with the stability of the business and family relations,” observes Smithers. “The overriding consideration for the court is to consider fairness, but if the correct advice is sought and the principle conditions have been met, an agreement such as this can go far to ensuring that the fall-out from a divorce does not impact the wider family members.”

Unfortunately, divorce is a fact of life nowadays, but with the appropriate forethought, businesses can be preserved for successive generations.

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