The Family Business – Pre-nuptial and post-nuptial agreements for the family owned business

Asset protection is important for many families, businesses and individuals. This can be achieved through a combination of tax and investment planning or adopting particular trust structures. The importance of taking specialist Family Law advice at an early stage is often overlooked despite that the fact that 42% of marriages in the UK end in divorce.

Pre-nuptial and post-nuptial agreements are a useful way of regulating finances in the event a relationship ends. A pre-nuptial agreement is a contract between a couple entered into before a marriage or civil partnership. It typically sets out how assets are to be divided between them if they separate. A post-nuptial agreement is exactly the same sort of contract but is entered into after the marriage or civil partnership.

In addition to looking at potential income needs in the future, these agreements set out which party owns, or will own upon separation, which assets. Couples will often seek to differentiate between marital and non-marital assets. Marital assets will include assets acquired during the marriage and those in joint names. Non-marital assets will include businesses and other assets owned prior to the marriage and inherited wealth.

For family owned businesses nuptial agreements create security and a means of protecting the owning spouse’s interest in the business as well as protecting the business for other family members and future generations.

English family courts have the power to make a variety of financial orders upon divorce or dissolution. They have wide discretion and will look to share assets built up during a marriage. The court also has the power to utilise assets which were available to one of the spouses before the marriage, if this is necessary to meet the needs of the other spouse. What constitutes “need” will be generously interpreted taking into account the standard of living the couple enjoyed during the marriage.

If there is no agreement and the marriage breaks down the value of the business and the income produced will be at risk. The value of the business will be taken into account by the family court even if the business was established prior to the marriage. Careful consideration will need to be given to assets held in trust.

So, what are the risks to the business owner?

• The court may order that shares in the business are transferred to the non owning spouse or, that the spouse who is already involved in the business, maintains their position.
• If it is not possible to raise sufficient capital to pay the other spouse a lump sum the court will, as a last resort, look at the sale of a business to meet marital claims.
• The court can impose restrictions on asset movement and business transactions by way of freezing orders if the court consider there is a risk that assets are being dissipated prior to a settlement being reached.
• If agreement cannot be reached following separation this can lead to costly litigation.

Currently nuptial agreements are not formally binding in England and Wales. However, since the mid-2000s pre and post-nuptial agreements have been regarded by the court as persuasive and even decisive. A well drafted nuptial agreement is highly likely to be upheld if a dispute arises during subsequent divorce or dissolution proceedings.

Upon separation a couple with a pre or post-nuptial agreement in place will be able to ask the court to make an order in accordance with the terms of the agreement. If one party tries to change the terms the court are likely to uphold the agreement if it has been drafted in accordance with the following established criteria:

1. Both parties should receive independent legal advice.
2. There should be full disclosure in relation to all financial resources available. This includes providing a value of the business and/ or assets held in trust. If the business operates as a limited company this would also be a sensible time to review the Articles to consider any restrictions in place in relation to the ownership of shares.
3. Pre-nuptial agreements must be signed at least 21 days before the marriage.
4. The agreement must be fair in all the circumstances and provide adequately for the spouse in the weaker financial position.

Nuptial agreements are sometimes a difficult subject to broach, particularly with the new partner coming into the family. It can help to consider implementing a policy that all members of the next generation enter into a nuptial agreement prior to marriage.

Family lawyers can help to document and distinguish between marital and non-marital assets, advise upon the terms of the proposed contract and achieve a strongly drafted agreement which is likely to be upheld by the court in future divorce proceedings.

This article is from the August 2020 edition of The Family Business, our newsletter for those working within family-owned businesses. To download the latest issue, please visit the newsletter section of our website. Law covered as at August 2020.

To keep up-to-date with the latest news, legal updates and seminar information, please register and select the areas that are of interest to you.