For start-ups as well as established businesses it is essential to anticipate bumps in the road that could destabilise day-to-day operations and profitability. For limited companies a comprehensive shareholder agreement should contain suitable provisions to minimise commercial disruption caused by future, turbulent events. For example:
- What happens when a director resigns?
- How should the shares of a deceased shareholder be treated?
- Are there pre-emptive rights to prevent an unwanted party from gaining too much control of the company?
- Are there restrictions on who can buy shares?
- What happens if directors or shareholders fall out?
DIVORCE AND YOUR BUSINESS – THE SHAREHOLDER AGREEMENT
One scenario that you should also consider carefully is how to handle, as a company, the divorce of a shareholder. Stability within the company during and after any key member’s divorce is critical. And the shareholder agreement should be explicit on the issue. How will an individual’s holding be treated during a divorce? For example, does the agreement specify how the holding be valued? Do other shareholders have to agree to any transfer of shares to an estranged spouse?
Of course the family courts will have to bear in mind how any order they make will impact third parties unconnected to the divorce proceedings. This includes other shareholders. But family judges do have a wide discretion when it comes to deciding financial settlements. They must try to meet the needs of divorcing spouses. And an interest in a business may be considered a financial resource for the purposes of any settlement. If that interest is included in the pot of assets available for division on divorce the repercussions for the company could be significant, particularly if the divorcing party is a major shareholder.
FAMILY COURTS AND THE CORPORATE VEIL
During divorce both parties must make full and frank disclosure of their assets. There may be a temptation to use corporate structures as a method of placing certain property beyond the reach of the divorce courts. Courts take a dim view of this and have wide powers to investigate any potential abuse. But investigating companies in pursuit of a family law settlement can sometimes give rise to a clear conflict between family law and company law.
The so-called corporate veil is a central plank of corporate law. It means that the company and the people who own the company (the shareholders) are separate legal entities. It provides certainty to shareholders and investors and is rarely tampered with.
However in the case of Prest v Prest (2013) the Supreme Court considered whether it could transfer assets belonging to a company set up by the husband to the wife on the basis that the husband was the beneficial owner. In its judgment the court made clear that if there was no other way to achieve the desired result in divorce financial proceedings the corporate veil could in theory be lifted.
As it turned out it was not necessary to lift the corporate veil in Prest (because there was another legal mechanism to transfer half of the company assets to the wife). Nevertheless the comments of the court on piercing the corporate veil are sure to be pored over in any future litigation on this point.
It’s worth pointing out that legitimate, long-running commercial entities are unlikely to be treated in this way. Particularly if there are several years of accounts and annual returns available for the court’s inspection.
CAN I USE A PRENUP?
Increasingly we see prenups and post-nuptial agreements being used to try to cordon off business interests from any future financial negotiations around divorce. In certain circumstances courts will uphold these agreements. But before entering one it is essential that you and your spouse get independent legal advice.
The issue of valuing and transferring business assets on divorce arises frequently. When a business is owned solely by one spouse or is wholly owned by the husband and wife division of the business is usually more straightforward. It is when third parties with separate rights and interests from the divorcing spouses come into the picture that the situation becomes more complex.
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