Protecting family businesses from the impact of divorce

It is estimated that there are 4.8 million family businesses in the UK (Institute for Family Business Report 2017-18), making up 87% of private sector firms in the UK and 92% of private sector firms in Scotland.

Depending on the plans for the business, the principals may well be taking professional advice on succession planning, such as continuity of the business in the event of sudden death or the most tax-efficient way to pass the business on to the next generation etc. But how often is the impact of divorce of one of the partners or shareholders considered?

Our family business team explains some of the key points for family business owners to consider with a view to protecting business assets from the impact of divorce.

What does the shareholder agreement say?

Does the company’s shareholder agreement contain pre-emption rights, or are there permitted transfers that require to be considered in the context of divorce? Should the Agreement state that transfers between spouses are to be automatically transferred back in the event of separation?

Employment rights

Family businesses often engage several generations and couples, whether married or cohabiting – are there legitimate contracts of employment in place? Business owners may need to consider the potential for claims for constructive or unfair dismissal, disputes regarding pay, and so on.

Pre-marital assets

Perhaps most worrying is the possibility that an asset that had the potential to be ring-fenced from any claims on divorce could have unwittingly fallen within the definition of matrimonial property, thereby dramatically increasing a spouse’s claim.

Depending on the other resources available to a business owner who finds him/herself in this position, there may be no option but to use the business as security or, worse still, sell off certain business assets in order to meet the claim. Needless to say, even the most supportive of families would find it difficult to absorb the emotional and financial fall-out from such an event.

It is also important to note that the definition of matrimonial property and how it is applied differs significantly between Scotland and England.

It is not uncommon for interests in multi-million-pound family businesses to accidentally fall into the ‘matrimonial pot’, often as a result of legal or tax advice received in relation to the business. The business owner may then find him/herself having to resort to costly litigation. Clients considering reinvestment or restructuring within their personal or business affairs are best advised to consult a family law specialist to consider the potential implications, and whether a pre- or post-nuptial contract may be appropriate.

Following the credit crunch and Brexit, it goes without saying that all investors are more aware of their financial vulnerability – individuals are marrying later, having built up assets along the way, and some have children they wish to protect from previous relationships. Others may feel the responsibility and pressure of being the custodian of family heritage, be it a country estate or family business. All of this has led to an increase in the reliance upon pre- and post-nuptial contracts and, in some cases, trusts – these can help ring-fence the value in assets for future generations whilst liberating them for further investment.

Legal advice available

The impact of divorce on a family business will depend on its structure, the relationship between its principals and the extent to which such an eventuality has been considered and planned for. Ideally, family law advice would be sought at the point of drafting a partnership or shareholders’ agreement, and certainly before any restructuring takes place.

Obtaining advice concerning family law matters at the same time as getting sound corporate law advice is a real opportunity to minimise the disruption and upset caused by acrimonious divorce and to protect family businesses for future generations.

As a law firm that was founded by the MacRoberts family in 1861, our team has the empathy, understanding and legal expertise to help your family business flourish. Find out more about how we can help you.

Furthermore, our family specialist family lawyers advise on all areas of family law. Mindful of delivering value for money without compromising quality of service, we work collaboratively with our clients to help them find the best possible outcome, reach an early settlement and maintain relationships where possible. If you would like to speak to a member of our team, please do not hesitate to contact us. 

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