How Normalising Pre-Nups Can Safeguard Family Businesses In Divorce

Those with family assets to protect are keen to ensure that they pass down the bloodline rather than face claims from a spouse, which may involve other family members if they too hold shares. Where the couple's assets are in excess of their respective needs, the starting point is a 50:50 share of the marital assets. In order to meet a spouse's claim, the Family Court has the power to order a sale of a family-owned company (if owned wholly by one or both spouses) or a sale of shares in a family-owned company. Alexandra Hirst, Senior Associate, Boodle Hatfield shares here thoughts on safeguarding the future and how normalising pre-nups can safeguard family businesses in divorce.

We have seen a huge increase in the use of Pre-nuptial agreements (PNAs), particularly with a view to protecting assets such as family businesses. The case law in this area highlights that where an agreement has been properly negotiated and completed, it is likely to be upheld by the Court and represents a significant break on the claims of the financially weaker party.

PNAs do not, however, oust the jurisdiction of the English Family Court which retains discretion to depart from its terms. To give a PNA the best chance of being upheld, it must be fair to the financially weaker party. Therefore, it would not be possible for the financially stronger spouse simply to ring-fence all the assets in their own name and provide nothing to the financially weaker spouse.

This raises the question that if the shareholder has little to nothing in the way of assets outside their shares in any family business, from what resources will they provide for the spouse? Equally challenging is a situation where a party has not yet inherited any shares but expects to do so in the future but has little or no other wealth at the time of signing the PNA.

When raising the idea of entering into a nuptial agreement, it is easier for the person seeking the agreement to be able to present the concept as a standard policy which applies across the family. If they understand that the agreement is a standard family - wide protocol that has been put in place by a family office, founding shareholder parents and/or trustees long before their relationship even began, it is often a more palatable conversation to have.

The English Family Court should give effect to a PNA that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement. Dynastic family businesses should therefore seriously consider introducing a policy of PNAs for family members as a standard matter of good practice.

The essential questions that need to be answered in relation to a PNA are:-

• Did both parties understand it?

• Were both parties properly advised as to its terms?

• Did either party put the other party under pressure to sign it?

• Was there full disclosure?

• Did each party willingly sign the agreement?

• Did either party exploit a dominant position either financially or otherwise?

• Was the PNA entered into in the knowledge that there would be a child or children?

• Has any unforeseen circumstance arisen since the agreement was made that would make it unfair to hold the parties to it?

Family business owners can be concerned about disclosure requirements. It is often the case that the family office, parents and/or the trustees of a potential spouse do not want that individual to know the extent of the likely future inheritance or benefit coming to them. The party to the PNA can only disclose assets that are known and to which they are entitled. Where there is a potential inheritance the party can only disclose what they know. It may therefore be that the most the party can say by way of disclosure is that they may benefit from the demise of a member of the family and/ or from a trust but the extent of their potential benefit is presently unknown to them.

Where a family adopt a "low profile" as to their wealth, they are understandably nervous about communicating details to a third party who is not a lineal member of the family. In such cases a pre-disclosure confidentiality agreement can form part of the process.

There may also be a concern that disclosure is a large and complicated exercise which will involve significant work. This does not have to be the case. It is essential that both spouses are represented by solicitors who regularly deal with PNAs of this nature. This means that they are not likely to see the disclosure exercise as a massive accounting exercise and instead, will deal with it pragmatically, ensuring it captures the salient aspects of the wealth and potential wealth. It is also the case that the certificate that each solicitor signs about the advice is generally of much greater value and persuasion if the Family Court recognises the solicitor as one who has significant experience in this area.

The key advantages of entering into a PNA are:

1. Certainty and transparency

2. Protection of family members and business partners

3. Minimises acrimony on divorce

4. Parties have autonomy to agree their own terms and come to flexible agreements

5. Saves money

6. Improves communication

The law on PNAs is now mature and developed. If compliant with the criteria noted above, an agreement ought to be regarded as binding. Dynastic family businesses should therefore seriously consider introducing a policy of PNAs for family members as a standard matter of good practice.

About the Author - Alexandra Hirst, Senior Associate, Boodle Hatfield. Find out more about the work they undertake with family businesses by visiting their website here