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Rules of disengagement

Can a family business survive a family breakdown?

Rules of disengagement

In this current economic climate, there are many difficulties that family businesses have to face. However, there can be few greater threats to the family business than having to deal with the implications of a divorce, or relationship breakdown, in the family.

The issues

Any shareholding or interest that a husband or wife holds in a family business will be subject to the scrutiny of the court and will be considered an asset available for distribution between the separating parties. This can be upsetting for the parties concerned, but can also impact significantly on the other family members involved in the business who can be innocently caught up in the dispute.

The court will want to make a valuation of the business, its liquidity, and the ability for monies to be extracted to satisfy the divorce settlement. In addition, there can be complicating factors such as the valuation of any land or buildings owned by the business or analysis of company pension schemes which, in some cases, can own the building from which the business trades. This can impact on the whole family and cause anxiety regarding the stability of the business.

Practical impact

Matters can become particularly complicated if both spouses have an active role in the business. If there is animosity as a result of the separation, this can have a negative impact on the day-to-day running of the business. This in itself can cause practical problems of ensuring productivity if there is dispute in the day-to-day decision-making.

How to protect the business

If it is a long-standing family business and the objective is to ensure family succession, then it is important that consideration is given on any impending marriage within the family to ensure that business is protected in the event of a separation. Practical considerations would involve thinking carefully about the nomination of any shares or interest to the incoming spouse. Benefits of such action that may exist at the outset may have serious consequences if the marriage does not last as long as the business.

Consider carefully before making the incoming spouse a director, company secretary or employee. Separations, unfortunately, are rarely without a degree of acrimony and a departing spouse who is pivotal to the business may cause disruption.

Give consideration to a prenuptial or post-nuptial agreement. Although these are not legally binding in the UK, the case of Radmacher v Granatino in 2010 – and, more recently, the Law Commission’s recommendations in a report prepared in February 2014 - now mean that pre- or post-nuptial agreements are given great weight by the court if certain preconditions have been met when preparing the agreement.

Therefore, if agreement is reached as to how that business would be treated in the event of a separation, it can assist greatly with the stability of that business and family relations in the event of a relationship breakdown. The overriding consideration for the court would be to consider fairness. But if the correct advice is sought, and the principle conditions have been met, then an agreement such as this can go far to ensuring that the fallout from a divorce within the family does not impact on the wider members; and that the family business can still be preserved for successive generations.