Do you own a Family Business? How to protect it on Divorce

Divorce is an upsetting, often complex situation for most people. Generally, following divorce, the couple can go their separate ways having divided the matrimonial assets and settled the arrangements for any children of the marriage. However, in the case where the couple are both involved in a family business it can be quite a complicated exercise to value, untangle and divide the matrimonial assets fairly.

There are many aspects to consider when a married couple own and run a family business, many people are under the mistaken impression that a family business is regarded separately from the other marital assets. This is not the case and it can be included, even if one spouse has no involvement in the business or the business was founded by one spouse before the marriage. It should be noted that in a generational family business it maybe that the family own the business rather than the divorcing spouse, in which case, the business is outside the scope of the marital assets.

Often, however, each party plays an equally important part in successfully managing the business and under the circumstances, they are compelled to decide whether they can remain working together or whether one party should exit the organisation and receive a proportionately larger capital sum or larger percentage of the remaining matrimonial assets to compensate for the loss of the earnings and assets
in the family business. However, the courts are often reluctant to agree to all the liquid assets to be given to one spouse and the other spouse to receive assets that are tied up in a business.

Olu Ajasa, a partner, commented “there are a range of options available to a divorcing couple with regard to their shared business. The business could be sold, one spouse could buy out the other spouse’s share of the business - the couple could remain working together in the business - an equitable distribution of the assets could be applied allowing the business to continue and the exiting spouse to retain a financial interest in the business.” Olu further comments “the business must be valued before any actions or division of assets can take place. Each spouse’s entitlement must be established.”

Giambrone & Partners’ corporate and commercial lawyers point out that the type of business entity and whether there is a trust in place are all issues that create variance in the way in which a family business is dealt with in divorce. The Court will request a valuation unless the business is a straightforward income stream. The two foremost methods of valuation are, an earning based valuation to establish the ongoing financial capacity the business has or an asset based valuation. Another factor the Court must consider is how a business that is not performing well should be valued and regarded.

Daniel Theron, a partner, suggests “there are steps that can be taken to protect the business against the possibility of divorce when embarking on marriage. It is always advisable for owners of an existing business to take legal advice on this issue. Married couples that set up a business should also consider all unforeseen eventualities including divorce.”

Protecting your business from the consequence of divorce:

Pre-nuptial Agreement

Many people find a pre-nuptial agreement a difficult subject to raise but it is a reasonable suggestion, particularly if a one party already has founded a business or is involved in their family business. A pre-nuptial agreement has legal weight following the influence of the Radmacher v Granatino case. Such agreements define, amongst other things, the way the couple envisaged how the family business should be dealt with should there be a divorce – and it will usually be taking into account by the Court; provided the agreement was entered into freely without
coercion and both parties have both given full and frank and complete disclosures of their respective assets and financial resources – and both parties have also sought and obtained independent legal advice on the terms of the Pre-nuptial Agreement.

Post-nuptial Agreement

A post-nuptial agreement between the spouses is more likely to be upheld by the court – again with the proviso that the agreement was entered into freely without coercion and with both parties giving a full and frank and complete disclosure of their respective assets and financial resources – and both parties having also sought and obtained independent legal advice on the terms of the Post-nuptial Agreement.
Post-nuptial agreements are commonly drawn up to protect a growing asset or an asset that was not in existence at the time of the marriage, such as an inheritance.

Partnership Agreement

Incorporating a clause in a partnership agreement that sets out the provisions, in relation to the business, in the event that one of the principals is facing a divorce. 

Shareholder Agreement

Also, incorporating bespoke company’s articles, together with a shareholder’s agreement geared to defining the procedures for dispensing with the shares of the divorcing shareholder.

Negotiating a Financial Settlement

Every effort should be made to come to an amicable financial agreement following divorce through a series of calm focussed meetings with your former spouse and professional advisors. Prolonged acrimonious negotiations will result in a hefty legal bill. Giving up the attempt to come to an agreement and handing the decision to the court will, almost certainly, significantly erode the marital assets and has the potential to be ruinous to the business.

Consent Order

Divorcing couples are often under the impression that once the decree-of -divorce has been obtained all financial ties and claims with the former spouse are severed. This is not the case, a former spouse is entitled to make a claim against your money
or assets at any time until such time as they re-marry. There are many reasons a further claim may be brought

• The circumstances of either or both parties have changed
• The belief that the original agreement was demonstrably unfair – if there has been incomplete disclosure or lack of disclosure of assets.
• The belief that the original agreement was rushed and subject to unreasonable pressure – or undue influence without one of the parties seeking and obtaining independent legal advice.
• A change in the financial status whereby one party inherits a significant amount or their earnings substantially increase and the other party believes that they are entitled to a share – due to non-disclosure of resources or incomplete disclosure of assets and resources.

Consent Order reflecting a clean break and an absolute bar on future financial provisions on divorce - is the only way to completely sever any financial responsibilities or entitlements a former spouse may demand at a later stage in an attempt to make a further claim against your assets.

Giambrone & Partners’ lawyers have a wealth of experience in protecting the assets enshrined in a business and negotiating acceptable fair settlements for both sides in a divorce. You can be assured that our astute lawyers’ will shelter and protect your hard won family business.

Olu Ajasa has extensive experience and expertise in all types of alternative dispute resolution for commercial issues, as well as commercial litigation. Olu advises on complex, high-value, domestic and multi-jurisdiction matters.

Olu assists clients in complex cross-border commercial disputes, shareholder disputes, partnership disputes, contractual disputes, loan facility agreements, secured lending, both corporate and insolvency relating to individuals. Olu has expertise in resolving real estate disputes (commercial and residential) and landlord and tenant law (commercial and residential).

He also has considerable experience in corporate and personal insolvency matters, including preparing and responding to statutory demands, winding-up petitions, investigating company directors and also assists with all aspects of corporate insolvency litigation.

Olu is highly regarded by his clients for his resoluteness in satisfactorily concluding complex disputes swiftly and in line with their commercial objectives. 

If you are facing divorce and own a business and would like to understand the implications for the business contact us at clientservices@giambronelaw.com or please click here