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:
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.
For strategic, cost-effective company law advice we are always available. Please call us on +44 (0) 203 670 5540 or contact us online.
"Shubha Nath is my go-to lawyer. She provided my department with commercial legal services for the best part of 10 years. She listens carefully to what the business requires, is clear in her explanation of complex legal agreements and frameworks and is incredibly fast at turning round documents. I was so impressed by her I've recommended her company Nath Solicitors to other businesses."Testimonial From Bernard McKeown
"Shubha, I'd just like to thank you for helping me to come to an amicable settlement with my former company co-directors so quickly and effectively. The advice and suggested approach certainly worked very well for me and I also felt a sense of safety and control being mentored through a very daunting process. You are brilliant at what you do and you helped me to cope with a very stressful situation. I would not hesitate to recommend you and Nath…Testimonial From Stephan Hepton
“I would like to thank and recommend Nath Solicitors and Shubha personally for all your professional advice and help. We have a variety of business interests from Medical and Dental to Analytics and Artificial Intelligence; I am extremely impressed how Shubha has been able to advise in all of these fields for a variety of unrelated projects. We have been particularly impressed with hard work, dedication, professional approach and personal touch. Dr Chetan.”Testimonial From Dr Chetan
I live in Saudi Arabia. Although thousands of kilometers separated us, I picked up the phone and talked to Shubha and I asked her to help me in what I believed was a fraud case. She answered gladly. She was smart, honest, and professional; she has been receiving my calls, letters and emails for more than one month did not seem to mind at what time I communicated with her and it was any time and she always responded quickly. Shubha…Dr Aldarwish ( International client)
We are pleased to note our satisfaction with the standard of service, offered to us by qualified and efficient team of Nath Solicitors. This is a Firm with high integrity and strong, traditional, values focusing on providing the utmost levels of customer satisfaction but don’t just take their word for it, take time to review their customer testimonials. Shubha Nath, who has been providing services to our company, has shown how passionate she is about her job and has delivered…MD of Security Company Dispute Resolution Testimonial
Client comment on company incorporation and advice on a shareholders agreement prepared by Shubha Nath. We felt well advised and Shubha protected our interests immaculately and we are truly very grateful to her for all her help in securing our interests. Director Food Company.Director of a Food Company