10 top tips to divorce proof your business

It is estimated that over 42% of marriages end in divorce and small and medium enterprises and family businesses can be directly affected by their key personnel’s family breakdown. They may be absent from work or simply take their eye off the ball. The business can become the subject of financial negotiations, at the very least requiring financial information to be disclosed or for the business to be valued and, in some cases, the court can order that shares are transferred or sold.

Julie Keogh – Family Law Executive – unpacks what can be done to limit the impact of divorce upon your business in practice.

1. Divorce proof your limited company now

Ensure the company’s articles of incorporation contain pre-emption rights to stop the courts transferring shares to your spouse. Also make sure there’s a shareholders’ agreement which requires all shareholders to have (pre or post) nuptial agreements and then make sure that they actually do it in practice.

Ideally shareholders will have a prenuptial agreement to ensure that any potential claims are limited before the marriage is entered into but it is never too late to enter into a nuptial agreement so think about postnuptial agreements too. Any agreement should then be kept under review, as circumstances change, to ensure they remain fair and more likely to be taken into account by the court.

2. Businesses can still be at risk if you are not married

Unmarried couples do not have the same financial claims as spouses upon divorce. So if you are not married, your partner cannot easily claim a share of your assets and your separate business assets are in theory protected.

However, your partner may argue that they have a beneficial interest in the business, even if they are not named as a legal owner. For example, if you ran the business together, your partner was promised a share of the business or if your partner contributed directly to the business. So, it is equally important to have a clearly written cohabitation agreement, to clarify who owns what, what would happen in the event of a relationship breakdown, and to have a shareholders’ agreement and the necessary articles of incorporation in place as appropriate.

3. Do you really need to involve your partner?

For many valid reasons business owners often employ their partners in their business, but rarely consider what would happen if they were to split. Upon relationship breakdown it is possible that not only will there be a hostile atmosphere in the workplace, but the potential for employment claims being brought by your ex-partner and other employees if the situation is not managed properly. Your ex-partner may also be able to claim a value in the business if they have been directly involved in it.

4. Take advice early

In the event of a separation, take legal advice at an early stage to understand the business’ exposure to risk in the specific circumstances. Once you know what the legal position is in relation to the business you can take whatever steps are available to limit the impact. These steps may include any of the following tips.

5. Team work is key

Think innovatively and work with your family solicitor, accountant, corporate advisors, etc. A joined-up process should lead to huge rewards and an opportunity to plan properly as you move forward.

6. Get the Financial Director/company accountant on board

The company’s Financial Director or accountant should be ready to spend some time with any accountant who has been appointed on a single or joint basis to report on the business for court purposes. Information and documentation requests are likely to be substantial, and it is usually better to co-operate as much as possible to ensure that the Court and the other party have what they need to properly understand the business in question.

7. Avoid court if possible

The court is a blunt instrument and not one well suited to consider something as complex as a business. Your assigned judge may be a children law specialist or a part-time judge working in an altogether different discipline. There is no guarantee of outcome. The Court process is slow and not necessarily confidential (there is always the risk of business discussions in earshot of other court users, and/or the risk of having your case judgment published for the world to read).

8. Mediate or collaborate

Working together is the best way to take account of wider considerations such as tax implications or succession planning for any children. Consider mediation or collaborative law as a way to sit around the table and explore all options. This will also enable you to move forward at a pace that is right for you and the business, as well as ensuring that you retain control over the ultimate outcome rather than handing over the decision making to a third party who knows nothing about you nor your business in practice. Laura Martin – Partner and head of Blanchards Bailey’s Family Law Team - is a Law Society Accredited Family Mediator

9. Arbitrate if necessary

If you are unable to reach an agreement for any reason, arbitration is an alternative to court and many business owners will already be accustomed to this in the commercial sphere. There are still predictability issues but the benefits are:

  • Speed, flexibility and the ability to timetable the process around busy people. Stages can be dealt with on paper to avoid hearings where appropriate.
  • There will be costs savings through not having lawyers engaged for as long. You can set the arbitration up in a solicitor’s office (or elsewhere) with break out rooms for those more confidential discussions.
  • You can choose your ‘judge’ – you can select a family law arbitrator with a strong commercial background.
  • Appetite for innovation - An arbitrator who understands what is being proposed is far more likely to structure their ‘award’ around detailed planning than a judge.

10. Support your colleagues

Separation and divorce are among the most stressful life events. Uncertainty about the future, a rollercoaster of emotions and fears about not seeing children are unlikely to mean that the day job has the full attention that it needs.

Review what your company can do to support your colleagues/employees, whether that is referral to a company paid counselling service, time off or a reduced workload.

Divorce is a trying time for all concerned, but by planning in advance on behalf of your business you can better ensure that if the relationship between you and your spouse does break down, your business is best placed to weather the storm.

If Julie or any of the team can assist, please get in touch on 01258 459361 or visit our Family Law page.

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