Surviving a break-up in the family business

Divorces can potentially wreck a family business, but there are legal protections and other structural safeguards.

Pre-nuptial and post-nuptial agreements might well become a standard way of protecting family assets in family businesses. That’s providing, of course, they get through the courts. Otherwise, family members will need other legal instruments to protect their interests.

Once the preserve of Hollywood marriages, business dynasties and the ultra-wealthy, these agreements are now becoming more common with growing material wealth, divorce rates, an increasing number of blended families, same sex marriages and de facto couples. Many in their second and subsequent marriages try to strike these agreements to get some clarity over who gets what, and how far the commitments and obligations extend.

This becomes even more critical when children inherit the family business. If there is more than one child, then statistically there is every chance there will be a divorce.  For the parents, a pre-nup is a way to ensure that the business is not placed at risk when there is a bust-up.

This can be difficult for many people who would find the idea of a pre-nup distasteful, because it projects a degree of distrust and lack of faith in the partnership. It can erode trust and can leave one feeling suspicious as to the motives of the other. Also, it is impossible to anticipate every change in the circumstances that may occur from the time a prenuptial agreement is written to when the marriage falls apart. It might seem reasonable at the time, but in 10 or 20 years’ time, one of the spouses may find the conditions ridiculous.

On the other hand many disagreements boil down to money, so getting it sorted up front is a good way to ensure these issues are sorted out further down the track. Also, the agreement itself might go some way to protecting the business in the aftermath of a messy divorce.

The big question is whether a pre-nup for a family business -- where there are so many other owners in the family – will stand up in court. What was deemed appropriate for one couple might not suit siblings and cousins.

To get around this, a prenup and post-nup -- which can be entered into at any time, even for many years, after the marriage or partnership -- can be incorporated as policy into the family constitution, as opposed to an agreement by individual request. In other words, every family member in a long-term relationship would need some form of agreement that protects the family’s assets and that makes a commitment to the departing spouse in lieu of them making a claim against the business, which is all enshrined in the constitution.

That might give it more legal weight.

But according to Paul Lucas from law firm Coleman & Greig, pre-nups are problematic when they get to the courts.

“The family law courts have tended to set them (pre-nup agreements) aside,’’ Lucas says. “Some have stood up, but not a lot.”

“It’s generally for reasons like there wasn’t full disclosure when there was the agreement, or secondly one of the parties didn’t understand it or wasn’t properly advised.

“Part of the rules around it are they have to go and get independent advice before they sign it, and the solicitor has to give a certificate saying they explained it and the person seemed to understand it.”

Having it as part of part of family policy in a constitution might help address that. “For example, you can have a family that says we want the ownership of the business to stay in the family bloodline and therefore we want each of the siblings to make sure their respective spouses contract out of any rights,” he says.

Even then, a pre-nup can be challenged in the courts.

“The Family Court would tend to say to a spouse who has ownership, ‘you pay your ex-spouse X dollars’ rather than require them to hand over shares. The court generally doesn’t want to see a situation that’s not going to work,’’ he says.

“If my siblings aren’t going to accept my ex-wife, then the court is not going to force her upon them.

“The court could say you transfer some shares to your wife, but if there are other siblings involved in ownership of the business, my experience is the courts would be reluctant to do that.”

He says a cleaner solution would be to formulate a shareholders’ agreement with the spouse or partner. That way, everyone is happy.

“If you get divorced, then we have an option to buy your shares off you,’’ he says. “So if I get divorced, what I end up with is not shares in the company but cash. The court can deal with that far simpler.”

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