The impact of a separation or divorce between business partners or shareholders in a family company can have a catastrophic effect. In some cases, spouses are making considerable contributions to the growth and success of the business in question and so the thought that they may have a claim to a share in its value may be less controversial. However, in all too many cases, a claimant spouse receives a windfall due to a lack of forward planning.
It is quite common for family businesses, particularly those on their second or third generations, to outgrow the original structure of the business. They may have developed from a sole-trader to a partnership in order to bring in other family members or in response to tax advice. Further changes to business structure can be fuelled by the desire to protect personal assets or to implement management decisions. It is primarily through the restructuring of family businesses that assets are unwittingly converted from non-matrimonial property ( i.e. assets that would not be taken into account in assessing the value of property to be divided between spouses on divorce ) into matrimonial property. Typical changes to the structure of family businesses include conversions from partnership to limited company, the creation of holding companies and “share for share” schemes whereby a shareholder of one company is allocated shares in an entirely different company. All too often, such changes take place without any consideration of the impact this could have on the value of divorce claims further down the line, usually because divorce is the last thing on anyone’s mind at the time.
In some cases involving conversions of assets, a spouse who has their own income and has never contributed to the family business will find that they are entitled to share in the value of their spouse’s share in the business even if the business was set up many years before their marriage. If the business is valuable this can dramatically increase the value of the other spouse’s claim on divorce and lead to problems for the business owner in meeting such a claim. Most businesses, particularly small to medium enterprises (SMEs), operate with little in the way of cash reserves and a significant claim could result in the business owner spouse having to sell their interest or, in the worst cases, sale of the business itself. It is not difficult to imagine the emotional and destructive impact this has on a family whose livelihood and sense of achievement has depended on this business for, in some cases, several generations.
When taking advice on how best to protect and grow your family business for future generations, it is important to consider the implications of separation or divorce further down the line, even if that is not currently in contemplation. Likewise, if you are considering a gift or transfer of assets to children or grandchildren for IHT or succession planning purposes, you should consult a specialist family lawyer for advice on the best way to protect these assets from divorce.
Author: Marika Franceschi. Partner, Shoosmiths LLP