Protecting your business on separation

Premarital agreements are well known for ringfencing inherited wealth, or "keeping it in the family" and we are regularly instructed to make this happen.

Surprisingly we don't often get contacted by forward-looking businesspeople wishing to protect their business interests in the event of separation. Many do get advice from accountants leading to spouses becoming directors, shareholders or salaried employees as a tax efficient way of running the business, which of course can be beneficial.

But, little thought is given to the potential implications of this should the marriage break down. In this instance, a spouse receiving a salary through the business has employment rights. Payments cannot simply stop because the relationship has ended, without proper consideration.

We insure our lives, our cars, our wedding days and our businesses. But, few people consider the risks to their business as a result of a change in status of your relationship, or a relationship breakdown.

Many people think that assets and value within a business cannot be touched on divorce, as a company is a separate entity, right? Wrong.

The case of Prest v Petrodel Resources Limited [2013] UKSC 34 saw Mr Justice Moylan "piercing the corporate veil" and ordering that properties owned by the Petrodel Group (Mr Prest's companies) be transferred to Mrs Prest.

At the very least the court is able to "lift the veil" and understand the structure and operation of the business and make its financial awards based upon that understanding, which may mean that the veil is cast aside completely. Read our review and comment from the time.

If you are facing developments in your relationship that may impact your business; or one of your fellow directors or shareholders finds themselves in this position, it is important to seek legal advice, from both your corporate / commercial lawyers and a family lawyer, so that you can make informed decisions.

Tips for "future-proofing" your business interests

  • Seek family law advice alongside your commercial or corporate advice to ensure that you are protected from a family perspective and to ensure that your intentions can be reflected as much as possible in the event of relationship changes in the future.
  • Consider entering into a shareholders' agreement.  This can cover key decisions such as what actions you can / cannot do without the consent of the other shareholders.
  • Consider drawing up a premarital agreement (or post-marital agreement if you have already tied the knot), which can limit claims and define how your business interests will be treated in the event that your relationship breaks down in the future.
  • Keep your business assets and personal assets separate. Seek advice before mixing the two, for example securing business borrowing against your home.
  • Think about retirement and succession-planning – who will inherit your share of the business, and the right time to put this into place.

Tips for protecting your business on separation

At the time of a divorce, an agreement has to be reached about how your family assets are divided. This includes everything that you and your spouse own, which is all notionally put into the same pot and divided to enable a fair settlement. If you don't reach an agreement, the court can impose an order on you.

All assets, income and pension need to be considered. This includes business interests, which are not automatically excluded in the absence of any clear written agreement (even if seemingly all owned in a limited company name).

Therefore, a business can be taken into account by the family court as something capable of being divided between you and your spouse, if liquidity allows.

Factors that will affect this and have an inevitable knock-on impact on liquidity include the existence of other shareholders and inheritance planning  - i.e. an intention to pass on the business to your children.

Some things that you may want to think about will include:

  • The impact on the business and other shareholders of your separation.
  • Agreeing the value of the business.
  • Whether you can keep your entire business interest, if it should be shared and if so, how, or how it can be offset and ultimately, whether it will need to be sold.
  • Keeping discussions about the business confidential within the divorce.
  • Making sure any agreement contains disclaimers or indemnities protecting against future claims against the business.
  • Whatever situation you find yourself in, this can be a complex area of law, and it is important to know your legal rights and responsibilities as a business owner and how this interplays with family life and law.

TLT has specialist family, corporate and commercial lawyers who can assist in these circumstances.  For more information, please contact Sarah Green.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

03 January 2018



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