Family law issues can be disruptive to a business entity, with the potential to adversely affect its activities, cash flow, and financial viability. Problems can stem from a relationship breakdown between domestic co-owners, or the divorce or separation of a third-party business partner or shareholder.
Protecting a business from potential loss and disruption in the wake of family law proceedings requires proactive measures. Whether a person owns a business interest individually, jointly, or through a partnership, company or trust, that interest must be disclosed if he or she is party to a property law matter and considered in the pool of assets available for division between the separated parties.
This article looks at some strategies business owners can implement to safeguard their business from the negative impacts of a family law matter.
Proactive steps to safeguard your business from divorce or separation
Risk management is about implementing strategies to minimise the adverse effects of an unforeseen event. As the name suggests, risk management is proactive and should take place at the planning phase of a business. There are certain steps that all business owners can take to minimise the impact a separation or divorce can have on their business.
Consider the business structure and its ownership
Choosing the best legal structure for your business will take into consideration a range of factors – the size and nature of the business, its anticipated growth, and the personal and financial circumstances and objectives of the owners.
Although the Court has discretion to make a range of orders in family law proceedings, different business structures may be treated differently. For example, businesses wholly-owned by one or both spouses / de facto partners are generally treated similarly to the other matrimonial assets of the parties, with consideration given to the parties’ respective contributions and involvement when making orders. When a business is owned in partnership with third parties or other shareholders, a Court may be less likely to make orders that fracture the business interests of the other owners.
Trusts, when properly created and managed, can assist in safeguarding assets in certain circumstances. However, this does not guarantee their protection in a family law property settlement.
Talking to your lawyer and understanding the different types of business structures can help you choose the most appropriate one for your circumstances.
Binding Financial Agreements
A financial agreement is a legal contract between a couple and may be entered before or during a marriage or de facto relationship, or after a relationship ends. These are sometimes referred to as ‘pre-nups’. The agreement predetermines the division of a couple’s assets in the event of, or after separation, and can deal with a range of financial matters, including the treatment of business interests.
A financial agreement can help keep the activities of a business on track in the event of separation by stipulating who should continue running the business, with provisions enabling one party to buy out the other at an agreed price, or based on an agreed method of valuation.
To ensure a financial agreement is legally binding, it must be properly documented, and the parties must obtain independent legal advice.
Partnership / shareholder / buy-sell agreements
Many people do not realise the impact that a third-party business partner’s family law matter can have on a business. A carefully drafted agreement can help keep the ‘status quo’ of a business and preserve its value in the event of such circumstances.
Partnership agreements, shareholder agreements and buy-sell agreements deal with a range of matters governing the relationship between business owners. In particular, these agreements can include provisions setting out what will happen should a specified event occur, such as the death, retirement or separation / divorce of a partner.
A buy-sell agreement includes rights and provisions for acquiring and disposing of interests in the business and specifies certain events that will trigger the right to exercise such options. The triggering events usually include the death, retirement, separation or divorce of a partner. Effectively, the agreement can restrict the ownership interests in the business to the existing parties, preventing an ex-spouse of an owner from acquiring an interest in the business as a result of a property settlement. Typical provisions include:
- prohibitions on departing partners, or their estates, from transferring / selling an interest to a third party without the prior written consent of all remaining owners;
- mandatory rights or right of first refusal for a remaining owner or owners to acquire interests from a departing owner, his or her estate or ex-spouse;
- methods for valuing a departing owner’s interest in the business;
- the automatic conversion of an interest to a non-voting interest upon the triggering of a certain event;
- funding / instalment arrangements for the acquisition of the business interests from a departing owner.
Similarly, where the business partners are also domestic partners, the agreement can stipulate the division of business interests in the event of separation or divorce (including which partner shall ultimately own the business) and how interests are to be valued.
Maintain accurate records
As well as making good business sense, maintaining sound financial and other records can be very beneficial for attributing contributions made between spouses / de facto partners to a business post-separation. These numbers and records will be important when determining respective interests if negotiating a property settlement and can greatly assist your lawyer when advising on the division of assets.
If a business owned outright between spouses or de facto partners is profitable, one of the parties may wish to retain it and ‘pay out’ the other. Alternatively, the business may be sold to a third party as a going concern while it is performing well. The more profitable the business is, the more likely the parties may dispute its future direction and the division of interests. Typical considerations will be the respective contributions of each party to the success of the business, whether financial or non-financial, and determining its value. In such cases a formal business valuation by a qualified expert can be beneficial.
Many business owners do not realise the impact a family law matter can have on their business, and it is not uncommon that planning for these contingencies is overlooked. In such cases, a sensible and cooperative approach is required to safeguard the business as it is in nobody’s interests to jeopardise its value because of intractable negotiations.
Preferably, the parties should explore alternative dispute resolution processes with the aim of achieving a fair outcome, remembering that the Court has discretionary powers to order a ‘just and equitable’ division of property including interests in the family business.
Talking to your lawyer and taking the time to plan for unexpected events can greatly assist in protecting the value and longevity of a business