Managing the business of divorce

By Hazel Wright and Graeme Fraser
Published: The Times on Tuesday 30th January 2007

How can entrepreneurs protect their work from other people’s big-money settlements?

Entrepreneurs are by nature risk-takers, accepting that their business may suffer downturns because of bad luck or tough competition. But these days, there can be another threat — a divorce in which a claim is made on business assets. And it may not be your own divorce — if your business colleague’s spouse makes a claim, a court can award a share in the business as part of the divorce settlement. The provisions will apply equally to the breakdown of registered civil partnerships.

If a marriage breaks down, a man or woman who has never been involved in a spouse’s business may be awarded a share in it, forcing either a sale or a restructuring to finance the settlement.

Last year an insurance tycoon John Charman was ordered in a contested claim to pay his former wife £48 million in what Mr Justice Coleridge, the High Court judge, described as a “huge money case”, involving assets exceeding £100 million. Charman has described the decision as “grotesque and unfair” and has appealed. The case is to be heard in March by the Court of Appeal, with a precondition that he provides security for his former wife’s costs of £225,000 so that she can afford to fight the appeal. This case marks the latest in a series of cases since the seminal one of Mr and Mrs White in 2000, which paved the way for greater equality for husbands and wives, to avoid discrimination on the basis of roles carried out within marriages.

Senior business figures have been forced to relinquish shares in order to fund divorce settlements. In 2003 Stephen Marks, of French Connection, sold £40 million of shares, reducing his majority shareholding from 52 to 42 per cent with reports saying that this was to fund his divorce from Alisa Marks, which was privately negotiated. She did not get shares as part of the settlement. In 2005, Mark Dixon, of Regus Group, sold nearly 3 per cent of his shares to raise the £28.7 million needed to pay his former wife. In 2004, David Harding, chief executive officer of William Hill, sold £5.2 million of shares, almost his entire stake, to fund his divorce settlement.

An unwelcome shock to businesses in recent years has been the power of family courts to order a transfer of shares to the other spouse. When the marriage of a significant shareholder falls apart, the financial directors and board members (and other staff who may be affected) should obtain independent legal and financial advice to ensure that their business is best protected. The sensible ones will already have in place a carefully structured prenuptial agreement and, for their businesses, a shareholders’ agreement to cover this possibility and to limit the damage that can be caused.

The courts are reluctant to take steps that will adversely affect a contract or agreement that includes the rights of a third party. In the case of A v A in 2004, the Family Division of the High Court pushed hard for a commercial solution to a husband’s claims on his wife’s 25.37 per cent shareholding in a company founded by her father, still within family ownership and control. The court recognised the dangers of a “snapshot” valuation and a forced sale. Competent advice about valuation and division of business interests saves a lot of cost and heartache about the way forward.

Since the widely reported decisions of Miller and McFarlane last year, family lawyers have been coming to terms with much higher payouts to claimants after short marriages. We have worked hard to differentiate between the value added to family wealth during the marriage (which can more easily be claimed in divorce) and what might be termed non-matrimonial assets (which are less available for sharing). Further, a ground-breaking concept from these cases of compensation means that if a spouse sacrificed a career to support the other in the marriage, there is a possibility of continuing payments of income for life, and the family may not have enough assets either within or outside a business to capitalise those income payments. In many cases, the income stream generated by the business will need to be preserved to enable the business owner or shareholder to fund his or her divorce settlement and other continuing obligations. Legal and accountancy advice is critical to good planning at this stage.

If you think you made an exceptional contribution to the family wealth, take comfort from Sir Martin Sorrell’s award in 2005, when he successfully established that he had done just that in his business WPP, so preventing his wife getting 50 per cent of the assets on divorce. A tariff is being established for such big money cases, and we expect the appeal courts to give us further guidance in this area, possibly in the Charman appeal.

Real life means that divorcing couples and their business associates need to be aware of what they can do to limit possible damage to financial interests so that fairness can be achieved.