On Divorce Day: is your business protected?

The first working Monday of the year is dubbed Divorce Day by family lawyers, but if you’re in business with your partner, things can get complicated.

A divorce is one of those things you don’t anticipate, plan or want to be party to. It’s tough to go through, especially when children are involved, but throw a business into the mix and there will be even more to consider.

In an ideal world, you will have a pre- or post-nuptial agreement, your house ownership will be clearly documented, and your business will have a partnership or a shareholders’ agreement. However, as a commercial lawyer I know this is rarely the case. Let’s be honest, ensuring you have the documentation outlining clearly allocated shares isn’t the most romantic proposition.

But divorces do happen and they can be bad for business if not handled correctly – in the worst-case scenario, it could be the end of your business as well as your marriage. If you own a company with your partner, what do you need to know?

The 50/50 split

Without legal documentation, the starting point in family proceedings is that joint assets are divided 50/50. Alternatively, your shareholding in the business when you set up (even if it’s since changed) will determine the division.

If a business decision is required during proceedings – such as renewing a commercial lease or approving an incoming investor – and you both own the company equally (by law or by default), but cannot agree, this could end with the company being wound up.

We have acted for many clients in this situation. Often, one partner plays no real role in the business, but they use joint ownership as a means to negotiate for more in the divorce. In another instance, one client lost everything because he never documented loans he’d made to the company. When he and his wife divorced, his extra investment wasn’t recognised.

Hiding assets

I have seen a variety of tactics deployed by couples when personal relationships sour. Delayed account preparation for the proceedings is common especially where one partner is an active director, with a relationship with the accountant, and refuses the other party access. Theoretically, an accountant must remain impartial on behalf of the company, but in reality this can be very difficult.

Gifting away or liquidating assets of a company at a lower value ahead of anticipated divorce also happens a lot. One of the spouses could sell business assets to a friend, intending to re-buy them later, for example. Legal documents should specify that more than one signature is required to sell and specify how these assets are valued but often 50/50 owners don’t think about doing this.

Luckily, if assets are undersold, the family court has powers to reverse the transaction or “count in” the asset at the actual value instead so that no real loss is suffered by the other party.

How to protect your business

Divorce isn’t something we want to contemplate while happily married, but if you run a business with your spouse, you should consider:

  • Transferring all intellectual property (IP) rights to the company – IP can be one of the business’s most valuable assets. If jointly owned, one party will need to buy out the other if they want to use it post divorce
  • Drawing up a founders’ agreement, setting out what happens in the event of a dissolution or dispute
  • Agreeing restrictive clauses to prevent the departing spouse from stealing clients, setting up in direct competition or sharing confidential information.
  • Specifying who owns what shares and clearly documenting any loans to the company
  • Getting a pre- or post-nuptial agreement. These can be very persuasive during divorce proceedings, providing each party has had independent legal advice
  • Making sure that your will mirrors these terms too, so that in the event of your death, it is clear how your shares or their cash value will be distributed

Amicable resolution

It is possible to find common ground during a divorce, providing both parties are open to finding an amicable resolution and some due diligence has been done in advance:

  • Have well-drafted contractual documents in place, covering the terms of the working relationship and how it can come to an end
  • Keep clear and distinct financial records, covering monies paid in and withdrawn. Clearly record any loans made to the company and document the terms for the repayment of that loan
  • Instruct lawyers and good accountants, who are known to resolve issues, rather than litigate
  • Consider exploring mediation and/or arbitration to discuss matters

Above all, any business founders should have their house in order to protect the enterprise and themselves. Clear legal documents mean that if a divorce does materialise, the business interests can be unravelled fairly, as easily as possible.

Karen Holden is the founder of A City Law Firm