The document summarizes key issues relating to divorce and family businesses. It provides statistics on family businesses and divorce rates in the UK. It then discusses the court's approach to dividing business assets, including moving away from treating them as "off limits" and now taking all assets, including illiquid business assets, into account. It provides examples of court cases and discusses methods for extracting value from businesses, protecting family businesses, and some brief real case studies.

1. Divorce and the Family Business Presentation for By Conrad Adam, Partner Family Law Department Cumberland Ellis LLP 1

3. Family firms produce 30% of GDP and account for 65% of the total 4.5m private sector enterprises in the UK economy²

4. Between 2007 and 2008 there were 136,226 divorces in the UK³

5. 38% of first marriages end in divorce. 52% of second marriages end in divorce. An overall average rate of 45%¹Warwick Business School “Finance for small and medium sized enterprises” 2005 ²Institute for Family Business ³National Statistics Office 2

7. Behaviour petitions allow for immediate divorce proceedings, often important in a business context3

8. The inevitable consequence of divorce? 4

10. The goose that lays the golden eggs

11. An income stream for the family5

13. Special or “stellar” contribution

14. Cowan v Cowan 2001: £11.5 million – black bin bags – genius. Wife gets c.£4.3 million.

15. Lambert v Lambert 2002: Husband received £20 million from sale of Adscene Ltd (media advertising). Offers wife 30%. Wife gets 50% on appeal, up from 37% – only in exceptional circumstances – locking Pandora’s box

16. Neither Cowan nor Lambert dealt with the difficulties of liquidity6

18. Wife not a shareholder. Husband had an interest in two service companies valued at £2 million gross and £1.75 million net of CGTColeridge J “The theory behind White is one thing, actual practicalities involving value, and dividing up, and/or realising certain species of assets make the obtaining of the White objective sometimes either impossible or only achievable at a cost that may not be overall in the family’s best interest. In this regard, of one thing I am convinced. I am sure the House of Lords did not intend to exercise their far-reaching powers to achieve equality on paper if in doing so they, Sampson-like, brought down or crippled the whole of the family’s financial edifice to the ultimate detriment of the children (whose interests, of course, remain the top priority in this and every case). BUT 7

19. N v N (Financial Provision) Continued But he continued …. “However, I think it must now be taken that those old taboos against selling the goose that lays the golden egg have been laid to rest; some would say not before time. Nowadays, the goose may well have to go to market for sale, but if it is necessary to sell her it is essential that her condition be such that her egg laying abilities are damaged as little as possible in the process”. 8

21. Wife awarded c.39% taking into account other assets9

25. Total assets c.£26 million. Agreed wife will receive £11 million, 43%. Consent Order

26. Share price in Principle Capital Holdings reduces from £2.99 Feb 2008 (£15m for H) to £0.27p March 2009

27. Husband applies to reopen the settlement

28. Outcome - tough12

30. 18 year marriage

31. Main asset farming company inherited and still worked by H

32. H’s shares entirely inherited or gifted

33. 30% of the value of the company ring-fenced leaving 70% to be shared

34. Enabled H to retain the farm rather than sell13

36. 29 year marriage

37. H inherited shares in a property owning company incorporated by his father, including a property which was the matrimonial home for a large part of the marriage

38. W accepts there should be a departure from equality and seeks a lump sum equal to 42% of all assets

39. 50% of H’s shareholding ring-fenced

40. 75:25 division of his shareholding

41. W receives in total £5.3 million equivalent to 32% of the total assetsNo complete ring-fencing in either case but taken into account in terms of overall distribution and settlement outcome. 14

42. Possible settlement structure 15

44. “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 their agreement”.

45. A significant strengthening of pre-nuptial agreements

46. Post-nuptial AgreementsMacLeod v MacLeod 2008 Privy Council Valid and enforceable, although subject to the court’s right to vary. 16

48. Shareholders Agreement – prohibition against transfers of shares to spouses

49. Articles of Association – prohibition against share transfers to spouses

50. Pre-emption rights for other shareholders on a disposal/transfer

51. No standard pre-emption rights protection under the Companies Act 2006 (there is on allotment, but not on transfer) s.561

52. In practice many companies seek to disapply default provisions in any event17

55. Third parties would include those who have real minority interests in the company as well as bona fide creditors and directors

56. Lifting the corporate veil is most likely to be acceptable where the asset concerned is, perhaps, the former matrimonial home or similar assets owned by the company other than for day-to-day trading purposes

57. Outcome : wife fails to enforce directly against business assets – but in 2008 wife successfully attacks the Jersey trust19

59. W unable to pierce the corporate veil

60. Other shareholders although submissive were not merely ciphers for the husband and the wife could not demonstrate any impropriety that required the incorporation to be ignored20

62. Other shareholders H’s 4 sons from his first three marriages. Divorce proceedings 2004

63. As at incorporation other shareholders aged 18 years to 6 months old. Company had significant property holdings. Including the property occupied by the wife

64. A Company incorporated in Jersey

65. Divorce proceedings consolidated with Chancery proceedings21

67. Whether children’s shareholdings subject to resulting trusts in favour of the husband, the children not having funded the purchase of any shares in the company?

68. Even if the children’s shareholdings in the company were real and genuine as opposed to nominal did the company hold certain properties upon constructive trusts for the benefit of the husband alone?

69. Alternatively should certain of the properties be regarded as having been settled on the husband (or on the husband and wife) in such a way as to allow the Court’s variation by resettling the properties on the wife free of any trusts?

70. Outcome: None of these arguments succeeded at trial22

74. Part of a growing trend for the English Courts to largely ignore (particularly self-settled) trusts and treat them as assets (strictly speaking “resources”) of one or other of the parties

75. Trust worth £68 million taken into account. The Dragon Holdings Trust. Settled during the marriage but some 20 years or so before the divorce

76. Departure from equality due to husband’s special contribution.

77. Husband employs 5 barristers and wife employs 4!25

79. Shadow experts

80. Use of the company’s or other accountants to assist with valuation at the disclosure stage26

82. Liquidity

83. Tax27

85. Discount for minority shareholding?

86. Trading vs. property investment companies

87. Marketability of shares, particularly minority interest in a private company - discount28

90. Otherwise just the “value” of the earning capacity of the party who runs it29

92. Employee

93. Shareholder

94. Reference to Articles of Association, any Shareholders Agreements, Contracts of Employment 30

96. Poon v Poon 1994

97. Parties were directors and shareholders of a family company. Other shareholders siblings of wife. Wife, as majority shareholder, seeks to remove husband as director

98. Where all shareholders related by blood or marriage, the family courts have jurisdiction in relation to all issues

99. Interplay with Chancery Division31

101. “Just an equitable winding up” application by minority shareholder? Appointment of liquidator and winding up and disposal – extremely drastic32

102. Using the business to help fund the settlement 33

104. Investments not used for trade?

106. Is security available?34

108. Stock?

109. Plant and machinery?

110. Trade debtors?35

112. Salary and/or bonus

113. Share buy-back

114. Issuing of loan notes (new company needed)Tax treatment of each is different as are the conditions/legal hurdles to be met. Satisfaction of HMRC for buy-back of shares and loan notes 36

116. Wife to obtain lump sum and discontinue in the business

117. Husband to continue in business37

119. But there can be major drawbacks the consequences need to be looked at by a commercial lawyer as well as a family lawyer

120. Specialist tax advice !!!38

122. Continued involvement of both parties generally recognised by all as problematic39

123. Six brief real case studies International retail business. Household name. Husband majority shareholder and CEO. To maintain control husband disposed of shares on the open market (Plc). Wife had wanted shares but this way husband kept control to the extent he was able to block any special resolutions and continue to run the business. As a result of the settlement wife was catapulted into the Sunday Times rich list. Manufacturing business. Husband 100% shareholder. Non disclosure issues. Selection of forensic accountant. Court application. Application for production appointment. Distribution company. 50% of shares held by husband. 50% of shares held by offshore trust of which husband beneficiary. Valuation on disclosure. Tax issues relating to bringing the entire structure back on shore. Property investment company. Husband majority shareholder. Husband’s shareholdings held on trust for the children. Husband’s ability to raise borrowings against trust property and pay himself very significant dividends. 40

124. Six brief real case studies - continued Property investment and letting business. Lettings via limited company. H 50% with business partner. Properties owned by separate partnership. Husband equal partner with same business partner. Valuation issues. Nationwide entertainment business. Husband entrepreneur and wife business manager. Group of 20 or so limited companies and a quasi property partnership business between husband and wife. Husband retains certain IP rights and use of business know how in order to establish new operations. Wife retains the existing business with a new investor in order to buy husband out. Certain IP and elements of the brand having been sold previously. It is essential to involve corporate lawyers when negotiating possible settlements involving business, because a family court on its own may not appreciate fully the business issues or company law issues. Cumberland Ellis is a full service firm with corporate and employment departments rather than a boutique family law practice where issues might be missed. 41

126. And finally …Treatment of husband’s company car 43

127. Thank you For further information contact Conrad Adam Partner Family Law Department www.cumberlandellis.com www.divorce-london.co.uk www.living-together-london.co.uk 4 May 2011 44