The authors of this article are Anna Patsalides, senior associate solicitor in the family department and Toby Walker, senior associate solicitor in the corporate and commercial department at . (Authors are pictured below.) The editors are pleased to share this content with readers; the usual editorial disclaimers apply to views of guest writers. To comment, email the editors at tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Anna Patsalides

Toby Walker

In September, a landmark judgment in LE v EL (2024) was handed down by the Family Court in a divorce case which may have repercussions for family-owned businesses in the future, if the shareholders, who are spouses, go through divorce proceedings. In this particular case, the husband was the CEO and majority shareholder of a private company holding 75 per cent of the shares with the remaining 25 per cent being held by the wife. They divorced after more than 20 years of marriage, with the company being the largest matrimonial asset.

The parties had further assets which included a family home worth in the region of £1.4 million ($1.84 million) with a mortgage outstanding of approximately £440,000. The equity would likely be reduced by an extension to the mortgage of £250,000 which was in the process of being completed as part of the legal services payment order which was made by the court to provide litigation funds for both parties. In terms of pensions, the husband had a SIPP equating to approximately £845,000 and the wife had an NHS pension with a transfer value of approximately £229,000. The parties also had significant liabilities of more than £1 million. 

The court ordered that all the parties assets constituted matrimonial property. The court was required to consider how the parties’ assets should be apportioned between the parties on settlement and whether it was possible to achieve a clean break where the single largest and dominating asset of the parties was the business. 

The wife had asked the court to order the sale of the business and for an equal division of the proceeds, however the husband had instead proposed to buy her shares and pay her £1.8 million in instalments over several years.

The judge rejected the husband’s proposal on the basis that it represented only 28 per cent of the overall net value of the company. The husband’s justification of paying £1.8 million in instalments was, somewhat, undermined by his own evidence as this gave rise to some uncertainty about the liquidity position and how the business could generate the requisite profit to enable the husband to make the proposed payments to the wife. 

In this unusual ruling, the Family Court ordered the sale of the business and its subsidiaries despite the fact it provided the husband’s income. This followed disputes over the value of the company between the single joint expert and the husband’s shadow expert, resulting in the judge ascribing a gross value of £7.8 million to the company. After the repayment of a director’s loan and relevant costs, the Family Court ordered that the sale proceeds should be divided equally, with a further £150,000 in costs awarded to the wife. 

Fairness
What makes this ruling interesting is that in weighing up all of the factors, the court made the rare decision to order the sale of the family business to achieve fairness for both parties. Until recently, it has been rare for the court to intervene in such a way and may signal a shift in attitude towards the court being more willing to make such orders to ensure a fair settlement for both parties. 

So how should married couples who own a business together structure the business to ensure fairness could be achieved if they later divorce  whilst still ensuring the successful running of a business?

From a commercial perspective, shareholders may initially rely on their Articles of Association or Shareholders Agreement which would typically cover the scenario of one person exiting the business and the sale of their shares (whether the exit is through a divorce or otherwise). However, in this case, shareholders should be minded to remember that the court has overall discretion as to how the assets of the parties should be divided to achieve fairness. 

Whilst divorce is not something the owners of a family-owned businesses may be contemplating, the shareholders may have to plan for a scenario that the value in the business may have to be released as part of a divorce settlement in the future and it is therefore prudent for business owners to give consideration at an early stage to the impact on the business of a divorce involving one or more of the owners

For many business owners this might mean understanding how the business could be valued and whether there are any alternative ways a fair settlement can be reached, such as providing appropriate provisions within the Articles of Association or Shareholders’ Agreement which could support any argument presented during divorce proceedings. 

From a family law perspective, it may also mean planning for the future in the event that parties later separate and recording this in a pre-nuptial or post-nuptial agreement so that parties can set out very clearly how the assets are to be divided on any future divorce (including any business assets), and which assets should be included in any settlement. This will potentially spare the substantial legal costs of litigating the matter later, at the time of any future divorce proceedings.