If you are in a business partnership, then you no doubt assessed the risks when you first embarked on your working venture. What you may not have considered is that although your business partner is not your spouse, there is still a potential for their divorce to affect you and your company. We look at some of the possible consequences of when your business partner gets a divorce.
What do you need to know?
Courts will refer to the Matrimonial Clauses Act 1973 when assessing any finances involved in a divorce, but there can be many factors involved and this can become complex in some instances. They will take into account what financial resources each party has. Therefore, if your partner has a share in the business, this will be considered. It’s important to remember that where possible, the courts prefer to financially compensate the partner who is not involved with the business with other assets, and leave the company to the party who owns it.
Valuing a business in divorce proceedings
When your business partner is going through a divorce the business will be valued to ascertain how much it is worth, what the earnings are and how it is structured. On occasion, this can be a long process and will entail assessing the division of the business, for example, if property or equipment are involved. Usually, an independent assessor or financial appraiser will be appointed who will act for both parties. Other assets your business partner has are also brought into the equation, so it could be that the business is considered not of any interest when all other finances are taken into account.
Disclosure of correct finances
Divorcing couples must provide honest and transparent disclosure of all financial information. If they do not and are found to have provided details that are untruthful then criminal proceedings can be brought against them, in rare cases. However, some may still attempt to conceal assets through business investments in companies far from the reach of their spouse.
In the high-profile case of Prest V Petrodel, the Supreme Court unanimously ruled that the founder of an oil business owned the assets of the business under trust as he contributed to their share price and could form part of the divorce settlement. The case helps to clarify situations where piercing the corporate veil is possible. Following the case, the courts had more power to intervene in a business where one of the divorcing parties owns a share or more.
How can I protect the business if my partner is getting a divorce?
If you are concerned about the prospect of your business partner getting a divorce, there are a few steps you can take. Firstly, if your company is Limited, then you can amend the shareholders agreement by adding or editing the valuation method if there is a divorce. This document can specify that consent is needed for a transfer of an interest in the business to the spouse of a shareholder. You can do the same with a partnership agreement if that is the structure of your company.
Your business partner could also enter into a pre-nuptial agreement if they are not yet married, or a post-nuptial if they are already married. These agreements give margin for married partners to specify what would happen to business shares and interest if there were to be a divorce.
Conclusion
The most sensible course of action for protecting your business is to have an initial and frank conversation with your partner. Discuss the potential outcomes for your business and agree on the action you will take if a divorce is on the cards in the future.