Pre-nuptial agreements and protecting the family business upon divorce or dissolution.

It is often not the first thought for a couple who are about to embark on married life. However a pre-nuptial agreement can be useful in order to reduce future disputes and protect assets, especially for couples where one party owns shares or is expected to inherit shares in a family business or has inherited assets they wish to protect.

The starting point for the division of assets on divorce or dissolution is an equal division. It is subject to the discretion of the Court as to whether there should be a departure from equality. Under the Matrimonial Causes Act 1973 the Court will consider a range of factors when exercising its discretion as to how assets should be divided including: each parties’ financial needs and resources, length of marriage, age of the parties and standard of living.

In cases involving family businesses, there is no certainty that the business will be “ring-fenced” from the division of assets. The Court will consider whether the business is matrimonial property and therefore whether it forms part of the matrimonial pot. A Court may take a pre-nuptial agreement into account when exercising its discretion which may assist in protecting a family business.

In England and Wales a pre-nuptial agreement is not automatically legally binding but it will be one of the factors taken into account in the court’s discretionary approach. The decision in the case of Radmacher v Granatino [2010] UKSC 42 found that more weight can be attached to pre-nuptial agreements provided that certain criteria is met. The Court held:

“The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to the agreement” (paragraph 75)

Therefore it is likely that the Court will uphold a pre-nuptial agreement if the following elements have been met:

1. Both parties obtained independent legal advice prior to entering into the agreement.
2. Both parties entered into the agreement freely without any pressure or undue influence and the agreement was executed at least 28 days before the marriage.
3. Prior to entering into the agreement both parties provided the other with full financial disclosure.
4. Both parties understood the implications of the pre-nuptial agreement.
5. The agreement was validly executed as a deed.

When considering whether a pre-nuptial agreement is fair the Court will also consider whether there have been any unforeseen changes in the parties circumstances which may render the pre-nuptial agreement unfair; or whether the agreement would prejudice the needs of any children of the family. It is unlikely that the Court will uphold a pre-nuptial agreement which is inherently unfair to either party or any children.

Provided that the Court is satisfied that a pre-nuptial agreement follows the above criteria, it can provide protection for individuals with family businesses by ensuring the business interest remains within the family. It will provide clarity for each party at the outset of the marriage about which assets are intended to form part of the matrimonial finances and allow parties to plan what will happen in the event of divorce or dissolution. It may also help to alleviate the possibility of contested financial proceedings upon the breakdown of a marriage or civil partnership, which can be a stressful and expensive process.

If you would like further information or advice, please contact Andrew Smith in our York office, Chris Burns or Sophie Arrowsmith in our Leeds office or Richard Buckley in our Sheffield office.