Business Owners & Founders, Divorce and Prenuptial Agreements

How will my business be dealt with on my divorce? Will it have to be sold or split up? Will I get a share of my partner’s business if we divorce? 

One of the most common questions we hear from entrepreneurs, founders and business owners is: “How will my business be treated if I divorce?”

Where someone has built up a business during or before a marriage/civil partnership, it can be difficult for them to contemplate that their interests in that business might become part of the assets available for division on divorce.  In contrast, the other person in the relationship may view the business very clearly as part of the couple’s joint assets.

In many cases, where that business interest is an income stream for one or both members of the couple, the business-owner may feel it is not practicable to sell or dispose of their interest in the business and, given the income stream, they may wish to continue their involvement with the business after the divorce. The non-business owning spouse may argue that where a business was built up during the relationship it should be available for division between them. Failing a sale or division of the business, that person may wish to take an interest in the business.

In the case of a company, a share-transfer can be a source of contention as it will continue to link the couple together financially post-separation, running contrary to the legal principle of achieving a financial clean break wherever possible. Should one person gain shares in a business that their ex continues to work in, they could potentially profit from their ex’s post separation success.  This is also contrary to the legal principle that neither party is entitled to share in each other’s post-separation endeavours or income, although it could be appropriate in some cases.

The case law in this area shows us that there is no “one size fits all” approach, and each case, and business, needs to be considered on its own merits in view of all the relevant circumstances. Those circumstances can include:

• What other assets are available for distribution?
• How large a part of the assets does the interest in the business form?
• Is it appropriate to “offset” the value of the business against the value of other assets?
• What type of business is it – does it hold assets and is there potential liquidity?

Other complexities can occur where one person works in the business but the couple are both shareholders, or in cases where the couple both own and work in a business together. In the latter example, the ex-couple will need to consider whether they wish to and are able to continue working together after their divorce, and if not, what appropriate compensation would be for the person who exits the business. In these cases, it may be helpful to involve other professionals outside of the family law world, such as accountants or company lawyers, to work in partnership with the couples’ family lawyers.

Do prenuptial agreements make a difference?

Of course, it is not ideal to make strategic decisions about a business’ future as part of a divorce settlement when emotions are almost invariably running high. The ideal time to discuss the business arrangements would be prior to marriage, in a prenuptial agreement.

Although prenuptial agreements are not binding in England & Wales, they are becoming increasingly common place, and are highly persuasive to a court. Where an agreement is reasonable and meets both of the couple’s needs it acts as a clear indicator of the couple’s intentions and the court is unlikely to deviate from that agreement.

Not only can a prenuptial agreement protect the business owner’s interests, but it can give clarity about how the business  would be treated in the event of a divorce. A prenuptial agreement in this context can deal with a wide variety of possibilities, ranging from:

• Whether the business interest should be ringfenced entirely;
• To what extent the business interest will become a matrimonial asset;
• The effect of transferring shares from one person to another, and whether this is intended to affect the status of the business;
• How the couple would treat a joint company where they hold either equal or unequal shares; and
• Who would retain the business in the event of a separation.

Similarly, it might be useful to consider how the use of shareholder agreements and partnership agreements within a company might treat the divorce of a shareholder, and the ability of a shareholder to transfer shares and make sure these align with the provisions within the prenuptial agreement.

Considering the status and treatment of business interests at the outset of a marriage within a prenuptial agreement can reduce uncertainty in the event of a divorce. This in turn could save huge amounts of time and expense. It is both an insurance policy and an opportunity to plan a business’ future strategically.