Matthew Humphries features in an article in FT Wealth about how a charity or family business run by a couple can survive if the couple split up. This article follows the recent announcement by Bill and Melinda Gates that they are separating but still plan to run their charitable foundation together as trustees. What are the pitfalls that need to be navigated in this situation, and how can a charity or family business plan ahead?
The article talks about the English court’s preference to keep finances separate after divorce if possible and quotes Matthew outlining why written agreements are so important:
“The English courts prefer divorcing parties to sever all financial ties if possible and affordable, so people can move on with their lives independently. Couples who choose to stay in business should be aware that working together after divorce can be fraught, both practically and legally.
“Matthew Humphries, a partner in the divorce and family department at law firm Stewarts in London, says for it to work there must be a written agreement, such as a shareholders’ agreement, covering in detail the allocation of responsibilities and how decisions shall be made. There should also be an agreed shared objective ensuring both partners have a common goal and a shared incentive to achieve it. ‘If the former spouses intend to keep working as a pair, they should consider appointing external independent advisers to help ensure there is an independent decision maker in the event of deadlock,’ says Humphries.”
The full guide in the FT can be accessed here.
Matthew draws on his experience to give some more detail and explain why it’s often better not to involve the courts if things can be kept amicable:
“Working together post-divorce, whether within a charitable foundation or profit-seeking enterprise, is fraught with difficulties, both practical and legal. For the continued joint endeavour to be a success, two key principles must be followed. First, there must be a clear written agreement, eg a shareholders’ agreement, covering in as much detail as possible the agreed allocation of responsibilities and how decisions shall be made. Second, there must be an agreed shared objective ensuring that both (former) spouses have a common goal and a shared incentive to achieve that goal.
“There are not many reported judicial decisions regarding spouses who have divorced where a judge compels them to continue to manage either joint enterprises or philanthropic endeavours. We have previously worked with just a handful of couples who have successfully managed their business together after their divorce. However, they were able to settle their disagreements amicably, away from the court’s intervention and the disharmony that litigation can bring.
“It is only really possible to continue running a business together post-divorce by agreement. It is very unlikely a court would order this outcome, recognising it is fraught with practical difficulties. That continuing interaction is also counter to the statutory principle known as the ‘clean break’. This means that if the family court can disentangle a couples’ financial resources and interaction, it will.”
Advice for couples running a joint business post-separation
Matthew gives his view on what couples should have in place to continue running a business or charity, and the common pitfalls.
1. What should you put in place to help the situation?
- Clear plans should be made from the outset. This will help mitigate the risk of conflict and confusion arising on the breakdown of the marriage.
- To avoid any chance of dispute about the purpose of a philanthropic endeavour, both parties need to be clear from the outset how the endeavour is going to be funded and structured. In the event of a later dispute, the court will examine the true character of the arrangement.
- Making any joint plans work in the future will rely on trust, communication and transparency. This is unlikely to be achieved by out and out litigation.
- The best prospect of keeping these values in tact following a divorce is to instruct a specialist divorce lawyer who has the required experience of dealing with complicated and/or valuable structures and also has the ability to be creative in achieving solutions to meet the client’s objectives.
2. How should it work in practice?
- A specialist divorce lawyer will advise on how to achieve consensus outside the courtroom, perhaps via a separation agreement or even a post-marital agreement.
- They will also know how to facilitate the other resources necessary, eg corporate lawyers for their expert advice, charity lawyers to deal with the required regulatory issues.
- If an agreement cannot be reached immediately, achieving an early settlement outside court by way of an early neutral evaluation will likely help protect any goodwill between the parties.
- If the parties have divorced and a financial settlement is being drawn up, consideration will need to be given to the mechanics of any decision making. Clarity will be required on whether the business/charity is going to continue exactly as before (if that is permissible under the governing constitution) or whether new structures are required.
- If the (former) spouses do intend to keep running and only work as a pair, they should consider appointing external independent advisors to help ensure there is an independent decision maker in the event of deadlock.
3. What are the common pitfalls?
- Thinking that everything can carry on as normal and no thought needs to be given to how a dispute will be resolved in the future if communication breaks down (this is not uncommon as time moves on and parties start new relationships/new families).
- Thinking that the detail can wait. This never works. If the endeavour is to be successful, frank and difficult conversations need to be had at an early stage.
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