Do you need to divorce proof your business?

It goes without saying that most businesses have insurance and contingencies plans in place should the worst happen, but our team of divorce solicitors believe business owners could be doing more to protect their company in the event their marriage breaks down.

A company may be your most valuable and prized asset, yet do you fully appreciate the financial risk a potential divorce presents to your commercial and business interests?

Divorce with a business involved

Where there is a company involved the fallout of a divorce can often be felt amongst it’s directors or shareholders, the impact of which can be damaging to the business as a whole.

Insufficient consideration is often given to the potentially serious impact a divorce may have on a business structure. When companies are scrutinised in the divorce courts what protection there is from the corporate structure of a company is not as watertight as you may assume.

For example on the case of Prest v Petrodel Resources Limited & Others, the Supreme Court ‘pierced the corporate veil’ and ordered the companies in question to transfer property assets to the wife even though they legally belonged to the companies not the husband. This was ordered on the basis that in the particular circumstances of this case the way in which the properties had been acquired by the companies meant that they were being held on what is known as resulting trust by the companies for the benefit of the husband. The court may not often go as far as ‘piercing the corporate veil’ but they are increasingly more likely to have a peek under it to try and establish the reality of the situation where there are issues as to whether assets are held by a company in an attempt to conceal their true ownership.

So what steps can be taken to divorce proof your business if it is set up as a company?

Many couples nowadays enter into a Prenuptial Agreement before they get married, or a Postnuptial Agreement after marriage, as it is a sensible way to plan for the future in the unfortunate event of a divorce.

In addition to entering into a Prenuptial Agreement here are a few other tips to help minimise the impact a divorce could have on your company:

• Make sure you define within a Shareholders Agreement what matters require the consent of shareholders.
• Include within a Shareholders Agreement a mechanism for valuing the shareholding in a divorce scenario.

As with a Prenuptial Agreement if you are looking to vary the terms of, or set up, a Shareholders Agreement in anticipation of marriage the terms should be agreed as far in advance of the wedding date as possible, there must be no pressure put on anyone to sign up to the terms, there should be detailed financial disclosure exchanged and anyone signing up to the Agreement should receive independent legal advice on the terms beforehand.

• Within any divorce financial settlement consider the option of entering into a compromise agreement to protect against things such as future claims against the business.
• Ensure there are confidentiality provisions in place to prevent any intellectual property or other commercially sensitive information being disclosed.
• When creating new (or restructuring existing) companies it is useful for your corporate and commercial lawyers to work together with family law specialists to try and help ensure matters are set up in a way to limit any difficulties in the event of a divorce.
• Where relevant it can be helpful to keep documentation and a clear paper trail which, if necessary, could be presented within a divorce as evidence that certain assets are not merely being held on trust for a spouse, and that the spouse is not the true beneficial owner if that is the case.

Dividing a business in divorce is complex and taking legal, as well as financial, advice is vital. Seeking advice from an expert family lawyer sooner rather than later is often the best way to help limit the risk a potential divorce could have on your company interests.