December 14, 2010
Many businesses are owned and run by family members. Where such members include a husband and wife, or where a husband or wife already has an interest in a business prior to the marriage, consideration should be given to what is to happen to the business if the couple were to divorce.
Early consideration of this issue can avoid excessive disruption to the business during contested divorce proceedings, which can take up to two years to be resolved in the courts. Time and money is often spent on the divorce proceedings, which should be invested in the business.
On a divorce, a family business is usually treated as an asset of the family. Therefore its value can be apportioned between the parties by the judge as s/he thinks fit, in the proceedings. Even where one party to the marriage has had no direct involvement in the running or financing of the business, they can still be entitled to a share of its value, if they have contributed in other ways to the marriage, for example through looking after the children and the home.
Often, the only way to apportion the value of a business is for the judge to order it to be sold. However, one party may wish to continue to run or own the business subsequent to the divorce. It may also be beneficial for both parties to keep the business running, if the income from it is relied upon to support them.
In order to maintain control, the business-owning party should ensure that a pre-nuptial agreement is entered into dealing with stakes in the family business on divorce. Following the recent court case involving the German heiress, Katrin Radmacher, such agreements are now likely to be upheld by the court as legally binding. For example, the business-owning party could agree that in the instance of divorce, they will transfer their share in non-business assets such as the family home, instead of the court having to order a sale of the business.
The Partnership Agreement or Articles of Association of a company could also cover what the position would be on the divorce of two partners or shareholder/directors. For example should one party be obliged to sell their shares or renounce their position as a director? Such measures can be useful where a divorce is acrimonious, in preventing a disgruntled spouse from deliberately disrupting the business.
