Wealth protection for business owners

In order to understand why wealth protection is important for business owners in a family law context, you need to understand how a court might deal with finances on relationship breakdown.

Businesses and personal wealth are structured for all sorts of reasons – tax efficiency, succession, inheritance planning and, of course, relationship breakdown/divorce. You’re unlikely to be able to tick every box for all scenarios at the same time, so awareness is key, then decide where your priorities lie. 

Finances in divorce are decided by reference to statute (in section 25 Matrimonial Causes Act 1973) and then by the application of that statute to specific cases. The “section 25 factors” that a court should consider include length of marriage, ages, financial resources, earning capacity, housing needs, standard of living, contributions… the list goes on. 

21st century law – equal share of the assets 

In 2000, the case of White ushered in a new dawn with equality, applying to both parties in recognition of equal contributions to a marriage in differing ways at different times. Before that, more often than not, a court could limit claims of the homemaker, often then the wife, to meeting their reasonable requirements which meant leaving the vast majority of assets, such as a valuable business, with the “breadwinner”, often the husband.

Society changes and so too does the law. Sharing the assets built up during the marriage equally now tends to be the starting point and can be the end point provided that meets the needs of both parties, and in particular any minor children. 

But what happens when there has been a business built up on one side of the family, perhaps preexisting the marriage in one way or another? Or where the really hard graft in establishing a business was undertaken by one party prior to the marriage? 

Businesses can look like they’re worth little in their infancy, but with a great product, an established management team and some fairly warm contacts, it can be a valuable asset already. A business owner can feel rather aggrieved at having to share all that came even before the relationship. 

The family court has wide ranging powers. Judges have complete discretion to reallocate assets, this includes shares and interests in private companies, business premises, directors’ loan accounts, cash and income streams, which can all be “invaded” to achieve a “fair” outcome in matrimonial proceedings. Assuming marriage is on the cards, some valuable wealth protection tools are discussed below. 

Company structure and documentation including shareholders’ agreements 

  • Pre-emption rights/first refusal are going to increase the chances that spouses aren’t given a shareholding. The company documentation makes it clear to the judge that a transfer of shares in a divorce won’t be accepted by fellow shareholders and will likely be unworkable. 
  • Consideration should be given to how shareholdings can be valued and approached. Hopefully, this will also support post-separation negotiations. 
  • Make sure that spouses or other family members don’t have the ability to create a stalemate and block company progress and stability pre or post settlement
  • Anti competition provisions in shareholders’ agreements and in employment contracts can stop family members setting up on their own 
  • Thought should be given to who should be a shareholder and why. Consider whether family members should become employees and/or shareholders. Aside from potentially tax efficient extraction of profits to the family, do they need to be involved? 
  • Shares in a business can be held within a trust structure, which can be a really helpful layer of wealth protection.

Nuptial agreements 

Nuptial agreements can formulate before or during the marriage. These are increasingly important and can include the following: 

  • Ringfencing of the value of the business from sharing 
  • Putting a value on your business now with evidence for what one party contributed to the marriage 
  • Allowing income generated from business assets to be ring-fenced; or ring-fencing assets acquired from the income. 
  • Stipulations around the sharing of a business built up and grown during the marriage, but not any pre marriage element nor any post separation/pre divorce accrued value. 
  • For the non-business owner, it can include indemnities from their partner to ensure they’re not affected by business dealings which cross the divide, eg personal guarantees or tax liabilities. 
  • If a company or partnership has a business policy that requires all existing and incoming business shareholders to have a pre-nup, this is good business sense to protect the company and makes it easier to introduce the concept of a pre-nup to the other party.

If the worst happens… 

Think very carefully about the approach you take when trying to resolve financial matters following a separation. 

There are so many options available now and court really should be seen as a last resort. Fire tends to feed fire in our experience. All cases have an outcome in the end, and that outcome falls within a range that an experienced family lawyer will be able to guide you on. Litigating may be the right option for you, but it can also come with an unpredictable cost both emotionally and financially. A negotiated outcome means you settle for certainty and you can structure an outcome a court may simply not impose. 

Negotiations can be facilitated by lawyers focused on this approach within a mediation forum using a collaborative law approach. 

With the correct approach, it’s possible to safeguard the business and reach a negotiated deal in a reasonable timeframe. The focus should be allowing the entrepreneur/owner to resume concentrating their energies on building a business that can thrive.

For guidance on managing your business, read our latest owner managed business special edition of Private Affairs.

Our content explained

Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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