How can I structure my family business to protect it on divorce?

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How can I structure my family business to protect it on divorce?

Too often, when complex corporate and other asset holding structures are created, wealthy families are not considering fully the serious financial impact a divorce may have on their business interests. What is needed is appropriate structuring, seamless advice, and the use of nuptial agreements: all are key to ensure businesses are properly protected.

What is the risk?

When complex corporate and other asset-holding structures are created, too often families fail to consider fully the potential - and potentially serious financial impact - a divorce may have on their business interests.

What is the approach of the court?

The court can order a transfer or sale of shares in a company owned by a party in the event of a divorce and indeed has, over recent years, found some imaginative ways to deal with business interests. For example:

In the 2013 case of Prest v Petrodel Resources Limited & Others the Supreme Court was asked to consider in what circumstances the court may take the assets of a company in order to meet the claims of another party. The husband, Mr Prest, had transferred a number of valuable residential properties to a group of companies known as the Petrodel Group. The issue for the court was whether, on divorce, it could order the properties to be transferred to Mrs Prest given they were legally owned by the companies and not Mr Prest.

The Supreme Court confirmed that only in very exceptional circumstances will the court be able to ‘pierce the corporate veil’ and make orders directly in respect of a company’s underlying assets. However, given the way the properties had been acquired in this case, the court found that they were being held on resulting trust by the companies for Mr Prest. The court therefore ordered the companies to transfer the properties to Mrs Prest and, in doing so, have provided the court with a further line of attack when considering companies on divorce.

What is the impact of the decision outlined above?

Potentially, this decision impacts any party who seeks to protect personal assets by placing them in a company. The court now look sat the reality of the situation when it appears assets may have been transferred into a corporate structure - transferred in an attempt to compromise financial claims on divorce.

Why should you plan ahead?

It is therefore crucial that families are alive to these risks and ensure protective measures are in place.

What is appropriate structuring?

Family Investment Companies or FICs (often instead of trusts) for the purpose of wealth and succession planning are being increasingly used by wealthy families. If these FICs are created, operated and managed in a certain way, they can offer some protection in the event a founder or shareholder divorces. One example of doing so might be the Family Investment Company’s articles of association including restrictions on share transfers to spouses and non-family members. I would also advise that careful thought be given to voting rights in respect of dividend and income distributions to shareholders, ideally to avoid a pattern of regular and substantial payments to a particular member as this may then be treated as a financial resource in the event the party divorces later down the line. And I’d recommend that there should be a standard requirement for shareholders to enter into pre and/or postnuptial agreements if they are to receive any benefit from the FIC.

What do you mean by seamless advice?

Family, private client and corporate advisers must work together seamlessly when advising families who are either creating new, or restructuring existing, companies. And caution should be exercised when families are acquiring assets within any corporate structure. It’s important to ensure the necessary documentation is in place and if required, disclosed in divorce proceedings to evidence that the assets in question are not simply being held by the company on trust for a husband or wife and, therefore, should not be treated as financial resources in the event a relationship breaks down.

Why nuptial agreements?

Properly prepared and well drafted nuptial and postnuptial agreements are effective asset protection tools in the event of divorce. These agreements should always be considered alongside the steps I have outlined above so as to further protect company interests. They can, for example, be used to ringfence company shareholdings, capital accrued from dividends and future income streams.

It is my strong advice that you consult a family solicitor with significant experience in this important area of the law so that you can both pre-empt, and protect, your business from much of the disruption that may be caused by a divorce.

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