The Importance of a Prenuptial Agreement for Business Owners
Despite the stigma it sometimes carries, drafting a prenuptial agreement can be a wise choice for business owners.
Elspeth Kinder, Partner at JMW Solicitors, explores how prenuptial agreements work and the circumstances in which they can be useful.
A prenuptial agreement – or prenup – is a wise investment of time and money for individuals who are planning to get married or enter into a civil partnership, and seek greater certainty in the event they separate. A well-drafted prenup can help safeguard the assets an individual brings into the marriage from passing to their future spouse against their wishes in the event of divorce.
While barely anyone would get married with the intention of getting a divorce, it is sensible to consider the possibility, particularly if one or both parties is a business owner. An element of stigma still surrounds prenuptial agreements, perhaps because some feel that having a prenup anticipates divorce before the marriage has even been celebrated. Discussing what would happen if you do split up may not be the height of romance but there should be no shame in doing so.
I want to put the spotlight on prenuptial agreements and offer some insights for entrepreneurs who may be thinking about how a prenup could benefit them and their family.
Can a divorce put my company at risk?
To be blunt, yes. Businesses are no different from any other asset; they will be taken into consideration in any financial settlement on divorce and, depending on the situation, may be divided between the parties. Precious time and money is invested in the launch of a business and it is deeply troubling to feel this could be at risk due to divorce.
Businesses are no different from any other asset; they will be taken into consideration in any financial settlement on divorce
Entrepreneurs who started a business before they married, sometimes many years prior to even meeting their future spouse, are not exempt from having its value taken into consideration on divorce, even though the mere fact of getting married does not necessarily entitle the parties to a 50/50 split across the board. There are many other factors in play.
At the other end of the spectrum, young entrepreneurs launching a business are, understandably, more focused on start-up capital than on the implications of the breakdown of their relationship. However, a divorce can pose a threat to any business and it is worth considering what difference a prenup could make. In order to evaluate the options, we need a bit of background on the law and what prenups can (and cannot) do.
How prenups work
In England and Wales, a prenup is not a binding contract. However, a series of cases in the 2000s, culminating in Radmacher v Granatino, has led to prenups being given far greater weight where there is a dispute over whether they should be upheld. The position now is that the courts will uphold a prenup entered into by parties who understood what they were doing, provided there are no factors that would make it unfair to do so.
Provided things are done properly, without undue pressure and in good time before the wedding or civil partnership, a prenup should stick. Giving clear disclosure and ensuring both sides get independent legal advice is highly desirable.
Because the prenup cases we hear about in the law reports are always contested, we never find out about the many couples who have divorced and simply kept to the terms of their prenup or, for that matter, parties who never divorce whose prenup just sits in the background. If it does have to be referred to on divorce, a prenup gives a couple a clear way forward, agreed at a less stressful time in their lives.
Provided things are done properly, without undue pressure and in good time before the wedding or civil partnership, a prenup should stick.
Prenups offer clarity and a partial opt-out from what the court would usually do on divorce. Crucially, they can restrict the range of assets available for distribution, especially where pre-marital, gifted or inherited assets are concerned.
A prenup to protect your business
One of the most important elements of a good prenup is making sure that it is realistic. An extreme agreement that would leave the financially weaker party with nothing whatsoever on divorce is highly likely to be ignored by the courts. Likewise, an agreement that ties the financial outcome on divorce to the parties’ behaviour – so things like “infidelity clauses” – risk undermining the prenup.
That’s what a prenup cannot do. What can it do? If there is a realistic plan to meet each party’s basic needs for income and housing, especially if there are (or may be) dependent children, there are many different options.
1) Consider how you would deal with assets acquired before cohabitation and/or marriage
The court is more likely to give weight to an agreement that seeks to ring-fence assets built up before the marriage than one which attempts to exclude assets built up during the course of the marriage. Structuring a prenup to identify clearly any pre-acquired wealth – for example, an existing share in a business – is a reasonable strategy.
2) Think about making provision for assets inherited or gifted during the marriage
The courts have been sympathetic to treating inherited and gifted assets received during a marriage differently from other property, provided they have been treated separately by the parties and needs can be met from another source. A prenup has a big role to play in underlining this distinction and is therefore a crucial element of any inter-generational wealth planning strategy.
3) Deal with the possibility of divorce and relationship breakdown in your corporate documentation
If you own a business with others, it may be worth asking your associates to also sign a prenup or, if they are already married, a post-nuptial agreement. This will of course depend on individual attitudes and there will need to be consensus. Partnership agreements, articles of association and/or shareholders’ agreements could even require that unmarried partners or shareholders get a prenuptial agreement before they get married.
Corporate documentation can stipulate that any transfer of shares to a spouse or civil partner must first be approved by all shareholders. This does not mean that the value of any business interests is automatically taken off the couple’s balance sheet. However, it makes it much more difficult for the shares themselves to be transferred to a non-owning party.
4) Keep records of your business finances
In order to ensure your prenuptial agreement serves its purpose, maintain a paper-trail evidencing the financial position of any relevant business. It’s all very well to say that a business had a certain value in the five years leading up to the marriage but without documentary evidence, this may be a difficult argument to win.
Business owners considering marriage should factor in divorce planning as part of a wider financial planning exercise. Prenups are the cornerstone of this process.
Please note that this article is written for general interest and should not be viewed as a substitute for legal advice.