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.
