How can I structure my family business to protect it on divorce?

Ruben Sinha, partner and specialist family and asset protection lawyer at JMW Solicitors, answers how to structure a family business in order to protect it from divorce.

Family wealth is often built over generations. Very often, much of that wealth will be held within one or more companies which a family will seek to protect at all costs. It is often assumed – incorrectly – that business interests are automatically ring fenced and protected on divorce. That is not the case.

The risk

Too often, when complex corporate and other asset-holding structures are created, families are not considering fully the potential and very serious financial impact a divorce may have on their business interests.

The court’s approach

In the event of a divorce, the court can order a transfer or sale of shares in a company owned by a party. The courts have, over recent years, also found more imaginative ways to deal with business interests. Here’s a highly relevant example of this:

In the 2013 case of Prest v Petrodel Resources Limited & Others the Supreme Court was asked to consider in what circumstances the court may take the assets of a company in order to meet the claims of another party. The husband, Mr Prest, had transferred a number of valuable residential properties to a group of companies known as the Petrodel Group. The issue for the court was whether, on divorce, it could order the properties to be transferred to Mrs Prest given they were legally owned by the companies and not Mr Prest.

The Supreme Court confirmed that only in very exceptional circumstances will the court be able to ‘pierce the corporate veil’ and make orders directly in respect of a company’s underlying assets. However, given the way the properties had been acquired in this case, the court found that they were being held on resulting trust by the companies for Mr Prest. The court therefore ordered the companies to transfer the properties to Mrs Prest and, in doing so, have provided the court with a further line of attack when considering companies on divorce.

What is the impact of this decision?

This decision potentially impacts any party who seeks to protect personal assets by placing them in a company. The court will now look at the reality of the situation when it appears assets may have been transferred into a corporate structure in an attempt to compromise financial claims on divorce.

Planning ahead

It is therefore crucial that families are alive to these risks and ensure protective measures are in place.

Appropriate structuring

Wealthy families are increasingly using Family Investment Companies or FICs (often instead of trusts) for the purpose of wealth and succession planning. If created, operated and managed in a certain way, FICs can offer some protection in the event a founder or shareholder divorces. For example, the FIC’s articles of association could include restrictions on share transfers to spouses and non-family members. Careful thought should also be given to voting rights in respect of dividend and income distributions to shareholders ideally to avoid a pattern of regular and substantial payments out to a particular member which may then be treated as a financial resource in the event he or she divorces later down the line. There should also be a standard requirement for shareholders to enter into pre and/or postnuptial agreements if they are to receive any benefit from the FIC (see below)

Seamless advice

Family, private client and corporate advisers need to work seamlessly when advising families who are creating new (or restructuring existing) companies. In particular, caution will need to be exercised when families are acquiring assets within any corporate structure. It will be important to ensure the necessary documentation is in place and if required disclosed in divorce proceedings to evidence that the assets in question are not simply being held by the company on trust for a husband or wife and, therefore, should not be treated as financial resources in the event a relationship breaks down.

Nuptial agreements

Well drafted and properly prepared pre and postnuptial agreements remain effective asset protection tools in the event of divorce. These agreements should always be considered – alongside the steps above – to further protect company interests. They can, for example, be used to ring fence company shareholdings, capital accrued from dividends and future income streams.

In short, you can both pre-empt, and protect, your business from much of the disruption that may be caused by a divorce if you consult a family solicitor with significant experience in this important area of the law.

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