By Yasmin Khan-Gunns, Associate, family law, BLM
With weddings again possible as the UK gradually unlocks, Yasmin Khan-Gunns, Associate within BLM’s London family law team, discusses the value of ensuring your business and commercial assets are protected ahead of the big day – or putting arrangements in place once the confetti has settled.
The whirlwind of wedding planning usually involves dress fittings, venue tours and cake tastings. It’s an exciting, if somewhat stressful time, that doesn’t often inspire conversations that revolve around separation.
However, business owners often take every precaution to safeguard their ventures, from taking out business protection insurance to funding. When entering into marriage, these precautionary measure ought still to apply, no matter how ‘unromantic’ the prospect seems.
What is a nuptial agreement?
A pre-nuptial agreement is a legal agreement made between two individuals before they marry with a view to establishing the division of finances in the event of divorce. A post-nuptial agreement is entered into after the marriage has commenced, for example, where one party has suddenly come into money, or if a couple has recently moved to England or Wales and needs to ensure agreements first prepared overseas will be given weight in the courts of their new home countries
Nuptial agreements can include provisions for how business assets can be shared with, or ring-fenced from, your partner. Again, whilst no one likes to consider the possibility of divorce, no matter how remote, these agreements can offer certainty, peace of mind and reduce disputes and legal costs, if the unthinkable should ever happen.
How are business assets approached during divorce?
No matter how unlikely divorce seems, couples set to wed or married couples ought to consider entering into a pre or post-nuptial agreement, especially if one or both are business owners. Why? In short, a judge will have regard to all of the assets and liabilities between the parties on divorce, in order to calculate an appropriate financial settlement. This includes the business itself, business income, business assets, shares, and so forth.
Ahead of any decision, family judges will require full financial disclosure of the business venture, with the business owner obliged to provide details including: the name, nature and extent of their business interest; whether the party is a sole trader, partner in a partnership with others or shareholder in a limited company; estimate of Capital Gains Tax payable if the business was to be disposed of; copy of business accounts over the last two financial years; and business valuation, amongst other measures.
A judge will also consider whether the business is matrimonial property, acquired during the marriage by the labours or endeavours of one or both parties, or non-matrimonial property.
In general terms, matrimonial property is likely to be shared equally and non-matrimonial property is likely to be retained by the contributor or shared unequally in favour of the contributor. An example of non-matrimonial property includes a business established before the marriage, or inherited by one of the parties or one that grows significantly after the parties have separated.
However, the distinction will carry little weight, if any, in a case where the parties financial needs cannot be met without resource to it, as needs have priority. The distinction may also carry less weight if the non-matrimonial property is or was of insignificant value, acquired many years ago or has been intermingled with other matrimonial property.
In most cases, one party retains the business or business interest, and the other party is compensated with a lump sum, lump sum by instalments, periodical payments, or a combination of these. The courts will need to consider whether a discount should be applied, as a result of illiquidity and or minority shareholdings.
If the business is a company, the court has the power to order one spouse to transfer their shares to the other spouse. The court also has the power to order the sale of shares owned by a party to the marriage.
How could a nuptial agreement protect business interests?
Though nuptial agreements are not legally binding in England and Wales, when drafted properly, they are likely to have a substantial impact on a judge’s decision, thereby protecting wealth, avoiding protracted and costly divorce and finance proceedings and reducing conflict in your marriage.
Nuptial agreements are certainly playing an increasingly important part in wealth protection and we are seeing an increase in the amount of couples entering into them, particularly those who have inherited wealth from their family; are first time buyers who have received a deposit from their parents; those who are embarking on a second marriage or those who are marrying at a later age. Whatever your circumstances are, it is important to obtain independent expert family legal advice to have the best possible chance of the agreement being upheld by the court.
How can we prepare a fair agreement?
A nuptial agreement is likely to be upheld by the court if it 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 the agreement.
On this basis, and for the best possible chance of success, nuptial agreements should be negotiated and finalised in good time before the wedding. Independent legal advice should be sought, the parties should not feel under pressure, have all relevant information material to their decision and the agreement should make reasonable provision for any child or children of the family.
For both pre and post-nuptial agreements, you ought to consider the following:
- Both parties have a good lawyer;
- The agreement is entered into only if both parties are doing so freely;
- Both parties disclose their respective assets and income position carefully;
- Give the document some human context. For example, if your intention is to ensure your business continues running smoothly on separation, say so;
- Don’t forget that you might need legal advice in another jurisdiction if there are foreign assets at play or one party has a connection with another country;
- Make sure it’s fair;
- Consider carefully what changes you may go through as a couple and provide for them;
- Considering including a review clause and use it;
- Supercharge the process by having a round table meeting, so everyone is on the same page on what needs to be achieved before the drafting process starts.
Contrary to popular belief, entering into a nuptial agreement is not an acknowledgement that there is a time limit on a marriage; instead, a simple document can provide clarity and guidance in the event of divorce, during an often tumultuous time.