Succession planning can be a headache for small business owners. They may run a business which was started by their father or grandfather, and they may have worked hard all their lives to build it into a successful company. As their own children have grown up they have brought them into the business, teaching them the trade from an early age and introducing them to important customers, suppliers and intermediaries. When they are thinking of retiring, or at least taking more of a back seat, they want to hand over some shares to their children. How can they be sure that the shares stay in the family? In particular, how can they ensure that the shares don’t end up as assets to be fought over in a divorce settlement if the children make bad marriages?
Accountants and lawyers have always been able to come up with imaginative solutions to safeguard shareholdings using shareholders’ agreements or trusts. However pre-nuptial and post-nuptial agreements are alternative simpler solutions which are gaining in popularity.
It is still commonly thought that pre- and post-nuptial agreements “are not worth the paper they are written on”. That is no longer the case. In England and Wales, the Court still has the final say on how assets should be divided on divorce. However over recent years, the Court has shown a growing willingness to give weight to pre- and post-nuptial agreements provided they comply with certain requirements.
The Supreme Court listed certain criteria which a pre-nuptial agreement should satisfy in order to be upheld by the Court, and the list was subsequently endorsed by the Law Commission. As a minimum the agreement should be drawn up well before the date of marriage, there should be no element of duress and both parties should have made full financial disclosure and had independent legal advice. Proper provision must be made for any children of the marriage, and the agreement should recognise the role of the family home as the “centre of gravity” of the marriage. Above all the agreement must be objectively fair to both parties. For post-nuptial agreements, similar criteria apply.
So the worried business owner may want to suggest to their children that before (or even after) they get married they enter into an agreement which stipulates that shares in the family business are “ring-fenced” and excluded from any divorce settlement. Often people marrying into a family will have no issue with this, recognising that the family business for what it is, a dynastic asset which belongs to all the family members, including future generations.
It is essential to take advice from an experienced specialised family lawyer who can professionally advise you and prepare a pre-nuptial agreement for you.