Divorce and the business owner: Tips for the unwary

Fiona Apthorpe

By Fiona Apthorpe, head of the family law team at Geldards.

In previous articles I have offered guidance for those seeking to protect the family business/family wealth from the risks of divorce, whether theirs, that of a co-director or a family member. In this article, I want to concentrate on the powers that the divorce courts have, place emphasis on why expert advice on these issues is crucial, and why it is important to choose a law firm which offers both corporate and family law expertise.

With divorce, the Court considers a statutory checklist of factors when deciding how to deal with finances. That checklist includes the assets which each party owns and subsequently that checklist includes business assets even where owned pre marriage or inherited.

The court will often require the business to be valued and the disclosure of confidential information to allow the statutory checklist of factors to be done, which may cause friction with fellow shareholders. It should also be noted that the Court can join the company in the divorce proceedings which will lead to significant cost and disruption for the business. It is important to ensure that the valuation does not over value the shares and to ensure that the way the business is run does not suggest a quasi-partnership which would negate the usual minority shareholder discount.

The shareholder will often argue for a discount based on risk and it is true that the court will deal with risk laden assets differently, but Courts are often sceptical as all businesses seem to hit a downturn pre divorce, and such an argument is countered by the potential reward factor. Note that if, stereotypically, the wife keeps most of the  house/cash and the husband keeps the business, which then plummets in value, the court will not reopen the deal as many disgruntled businessmen found to their cost during the recession.

Be aware that the Court can order the sale of the shares or an outright transfer to the other spouse, although to do so in respect of a private family company would be rare. Some thought and with expert advice in drafting the Articles of Association may prevent this risk. Where the husband and wife are the only shareholders, it is important to note that the Court has the power to vary any Shareholder’s Agreement and also to transfer shares between them.

What the Court cannot do however is to order the transfer of shares or assets owned by the company, even where the company is under the sole control/ownership of one of the parties, to the marriage. However (there is always a however in family cases!) the so called “corporate veil” can be pierced where a party has effectively used the corporate structure to hide or protect assets. This is a developing area of law and expert legal advice is needed.

Shares in a family business are often inherited or gifted and it can come as a shock to find that they are not thereby excluded from the Court’s powers. Inheritance Tax and wealth planning is crucial, but consideration should always be given to the risk factors of divorce, and expert advice taken to ensure that the family wealth is preserved within the family for the benefit of future generations. Pre (or even Post) Nups are not a romantic subject but if your ex son or daughter in law walks off with a share of your hard earned wealth, you might wish that someone had suggested one! Remember that you can have a very straightforward Pre Nup which simply ring-fences the family business in the event of divorce, leaving other assets to be split, an option that you may find easier to gently suggest to your happily settled son or daughter.