There are over five and a half million small businesses in the UK, many of them family-owned or managed. Combined they contribute some 50% of the entire turnover of the UK’s private sector, generating an income and wealth for their shareholders and directors.
Divorce, as we explained in an earlier article Divorce and the family business, can put additional stress on a business. Here, we explain how shareholders and directors can protect their business interests in the event of a divorce.
Articles and memorandum of association
All businesses in the UK need a memorandum of association to form a limited company. Alongside that will be the company’s articles of association that essentially sets out the rules of running the company. These documents are often bought ‘off the shelf’ and not amended. Little or no thought is given as to the possibility of disputes or claims, including on divorce, arising in the future and that is a mistake.
On divorce judges do not want ‘to kill the goose that lays the golden egg’ and will try to leave a business alone as much as possible. But where the business is a significant asset, the court may need to look at ways that either funds can be released from the company without harming the business, or look to sell shares.
Where there is just a single shareholder it can be difficult to build safeguards into the company, but when there are two or more shareholders, protection becomes easier. For example, the articles of association can stipulate that existing shareholders or directors have the right of first refusal to buy shares, stopping outsiders from coming into the business.
When starting a business and having your accountant or solicitor set up the company, it is advisable to choose a firm that offers family law services to ensure the simple step is not overlooked. Even if it is not dealt with at the time, articles of association can be changed at any time if 75% of the members agree.
Pre- and post-nuptial agreements
Business owners may also want to consider a pre-or post-nuptial agreement. Entrepreneurs often build protection into prenups to stop their business interests being impacted by divorce.
Broaching wanting a prenup can sometimes be tricky, but the desire to protect commercial interests is something that is usually accepted without too much dispute.
Going into business with your spouse
Divorce proceedings can become a little more complex if you and your spouse are in business together.
Sometimes divorced spouses can carry on working together post-divorce, but often this is not possible. Unravelling business interests in these circumstances is often complex. Agreement will need to be reached as to who remains in the business and there may need to be compensation for the leaver to reflect the fact that it may take time for the departing spouse to get back to their previous level of remuneration. There may be non-competition issues to consider as well.
Divorce is a stressful and challenging time, made more so when a business is involved. It is essential that advice is taken before any decisions are taken. Early advice is the best way to protect a business when facing separation and divorce.
Contact our Family and Divorce Teams
The Family and Divorce at Bishop & Sewell have a wealth of experience in dealing with divorce and separation, including all financial aspects.
For initial advice or to arrange a meeting with one of our team, please email family@bishopandsewell.co.uk or contact 020 7631 4141 and ask to speak to our Family Law team.
The above is accurate as at 07 March 2024. The information above may be subject to change.
The content of this note should not be considered legal advice. Each matter should be considered on a case-by-case basis.
