Legal
Protecting Business From A Divorce - What Steps To Take?

A divorce can force businesses to break up, with painful consequences not just for the parties directly involved. This article examines steps that can be taken to avoid such outcomes and mitigate the damage.
Dividing up a business in a divorce can be costly, complex
and stressful. Emily Brand (partner) and Katie O’Callaghan
(senior associate) at law firm Boodle Hatfield
examine what owners can do to protect their businesses in such
eventualities.
With such a high share of all businesses being family-owned, the
impact of divorce cannot be dismissed lightly. The editors of
this news service are pleased to share these views with readers;
they do not necessarily share all views of guest writers. Readers
can email feedback to tom.burroughes@wealthbriefing.com
and jackie.bennion@clearviewpublishing.com
Dividing up a business in a divorce can be extremely costly,
complex and stressful. Emily Brand (Partner) and Katie
O’Callaghan (Senior Associate) at Boodle Hatfield, the leading
family law firm, outline five key things you must do in advance
to help protect your business from a future divorce.
Make sure your pre-nup 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
have already built a 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 ought to 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’s 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.
Don’t make your spouse a shareholder of your business
without careful consideration
Before you get married, review your business’s shareholder
agreement. 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 ex 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 that 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 running your business extremely difficult.
Also 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 law as another
potential ‘front’ 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.
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 ex to buy out their interest in
the company.
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 avoid ordering a business to be sold, if possible, as
it would be unfair to affect their shares in the business when
they are not involved in the divorce.
A particularly effective way of protecting a business is to bring
forward plans to hand shares to your children. Courts have a
particular respect for family businesses, and do their best to
avoid having to break them up. Entrepreneurs could consider
bringing their children in as shareholders from early adulthood.