Protecting business assets when entering into marriage
If you are a business owner, either together with your spouse or business partner or independently, your business is likely going to form a key part of your assets that will require protection in the unfortunate event of a marriage breakdown.
If you don’t agree at the outset how a business asset might be treated if your marriage were to breakdown, it could lead to avoidable conflict in the future as to how the asset should be divided between spouses. Entering into a nuptial agreement (either before you get married or during the marriage) offers greater protection so long as certain safeguards have been met.
What is a nuptial agreement?
These are written agreements that seek to protect existing and future assets in the event of a marriage breakdown and to try to regulate how a couple’s financial resources should be divided with a view to avoiding litigation. Although there is no act of parliament in England and Wales that makes these types of agreements legally binding, the courts follow case law and there is now good law to say that a nuptial agreement will be binding if:
- both parties understand what they are signing and have received independent legal advice;
- both parties are entering into the agreement freely and under no duress;
- there has been an adequate exchange of financial disclosure;
- for prenuptial agreements, there has been a decent interval between signing the pre-nuptial agreement and the wedding date. The Law Commission recommends a period of 28 days, although it is not fatal to the agreement if the time period is shorter (even significantly so), providing it is clear the parties have had time to fully consider the agreement; and
- the agreement does not leave the financially weaker spouse in a predicament of real need, while the other is comfortably provided for.
Most importantly, however, is that the court retains jurisdiction to consider whether the terms of a nuptial agreement are fair or unfair.
What can be included in them?
In the context of seeking to protect business interests, it is important to include a clear definition of what should be considered “Separate Property” to be ring-fenced and kept free from any claim from the other party during divorce and what might be considered “Joint Property” to be shared equally or in certain proportions by agreement. This can include company shares and any income or accumulated income from a business or the passive growth of a business. The definition is often a point for negotiating.
It is very important that full financial disclosure is provided to include valuations of a business so that the financially weaker party knows what they might potentially be giving up by entering into the agreement. It is therefore in the interests of the business owner to disclose the business’ full value before signing the agreement to maximise what is being protected.
What are the risks?
A nuptial agreement needs to ensure that the financially weaker party is not left in a predicament of real need. In order to challenge a nuptial agreement, a party needs to show that their needs are not met by the provision under the agreement or that there were factors prevailing at the time that now render it invalid (e.g. non-disclosure). This is very important to consider when drafting the provisions to try and make the agreement as watertight as possible from any court intervention. So, if one party’s business is considered to be Separate Property and that is one of the parties’ main assets, it is important to consider how the financially weaker party’s financial needs can be met from other non-business resources. It might be that it would be fair to include provision for the other party to share in a business asset or profits up to a certain cap to ensure their reasonable needs would be met.
How can assets be protected from a company law perspective?
From a business perspective, the starting point are a company’s constitutional documents. In England, every company is required to have articles of association, a public set of rules that govern the company’s internal operations and contain the rights applicable to shares (voting, income and capital), amongst other things. If no bespoke articles are in place, the Model Articles apply, providing basic provisions on key matters such as share issues and decision-making processes. Ideally a shareholders’ agreement that works in tandem with the articles would also be put in place. A shareholders’ agreement is a private agreement between the owners (i.e. shareholders) of a company governing the relationship between the owners and the business itself. Although not strictly required, a shareholders’ agreement can be an invaluable tool for outlining rights, restrictions and expectations that owners may prefer to keep confidential.
Bespoke agreements offer additional flexibility, enabling tailored solutions for future planning and asset protection. For instance, in a private company limited by shares, the Model Articles do not impose restrictions on share transfers however a bespoke set of articles can establish rules governing transfer conditions, such as limiting whose shares can be transferred to and at what price. A common provision might include a restriction on transferring shares without offering them first to the existing shareholders’ of the company, except in cases involving transfers to spouses (to facilitate tax planning), with a caveat that if the spouse is no longer married to the shareholder, the shares must be returned at nominal or nil value to the original shareholder.
Although no one enters into marriage expecting the worst, agreed-upon expectations at the outset – and formally documenting them – can provide a crucial roadmap in case things go awry and should the company ever think about taking third party investment, many investors insist on these sorts of protections.
