Going through a separation or divorce is more often than not an extremely difficult and emotional experience, no matter the circumstances. A significant number of the cases we deal with involve business assets – sometimes spouses working together, sometimes one spouse having shares and a notional role in a company run by the other spouse. These circumstances almost always complicate matters, making the process much more difficult for both parties.
Whatever the situation, the emotional strain of a marriage ending can make it very hard for those involved to make objective and fair corporate decisions, especially where that involves the other person.
It is vital that separating couples who also work together do not make hasty business decisions coloured by the impact of the separation, as they run a real risk of leaving the business, or in some cases themselves as individuals, open to the risk of legal liability. This article looks at just some of the key legal risks at play, with a particular focus on employment and family law considerations, including a recent Employment Appeals Tribunals (EAT) case considering marital status discrimination.
Considerations for directors and shareholders
A husband and wife might be co-directors and shareholders of a company and one party may wish to remove the other from their role in the business if their personal relationship ends. First and foremost, the company will need to ensure it acts in accordance with its obligations under the Companies Act 2006, and with consideration for the terms of Company’s Articles of Association and any director/shareholder agreements that might be in place. If these obligations are disregarded or breached, the shareholders and/or directors of the company could ultimately find themselves personally liable in the civil courts.
From a family and employment law perspective, the Family Courts and Employment Tribunals will not involve themselves in the general running of a business and do not have authority to make orders relating to day-to-day management. In a family case called Poon in 1994, the court granted an injunction to the husband going through divorce proceedings to prevent the wife from taking steps to restructure the company so as to diminish his role in their business. That is a rare example of a Family Court Judge intervening in a business and a decision that probably shouldn’t be relied on – it was not followed in the more recent case of C v C in 2015. In that case, the High Court judge held that the court had no jurisdiction to make a freezing order to prevent the wife and son who owned shares from making business decisions that would prejudice the husband – a very similar situation to Poon.
As a practical step, it may be wise at an early stage in the separation to try to agree some ground rules in an interim shareholder agreement pending the final outcome – for example no recruitment over a certain level of salary without consultation, no major expenditure except by agreement, a limit on dividends that will be taken and joint communications to staff. Destabilising other employees and thus damaging profitability is very common and whilst difficult, if divorcing business owners can present a united front, that can help to maintain the value of the business assets.
As part of a financial settlement the Family Court does have the power to make an enforceable legal order relating to shares in a business – for example an order that they must be sold or transferred to the other party.
Risks of dismissal
If one half of a divorcing couple is a director and shareholder in a business, and the other party is an employee, the more senior party might wish to terminate the employment of their ex-partner. Doing so without following a fair and reasonable process and without a statutory “fair reason” would leave the company open to claims in the employment tribunal for unfair dismissal, if the employee had at least two years continuous service. Similarly, if the employee felt “forced-out” due to the difficulties of the separation and ultimately resigned, they might be able to bring a claim for constructive unfair dismissal, if they could prove that their treatment was so unreasonable as to constitute a fundamental breach of the employment relationship.
If the Employment Tribunal find a dismissal to be unfair, depending on the circumstances, the employer might be ordered to pay the employee a basic award equivalent to their statutory redundancy entitlement and a compensatory award to reflect lost income.
Discrimination in the workplace
Employees are protected by statute from unlawful discrimination on the grounds of protected characteristics. These protected characteristics include “marriage or civil partnership” and “sex”. One half of a divorcing couple might feel that they are being treated less favourably due to their separation. For example, if their spouse is withholding work from them due to the separation or making jokes with colleagues at their expense that could cause them to feel very uncomfortable at work. In these circumstances, the spouse might be able to bring a discrimination claim against their employer and/or named individuals.
In a recent Employment Appeals Tribunal (EAT) case, the EAT considered discrimination on the grounds of marital status. In Ellis v Bacon and AFS, a bookkeeper (Ms B) had married the managing director and majority shareholder of the business (Mr B), subsequently also becoming a director and a shareholder. Another individual later joined the business as a director and minority shareholder (Mr E). Shortly after Mr E had joined the business, Ms B indicated that she wished to separate from Mr B and issued divorce proceedings. False accusations were then made against Ms B, and she was ultimately dismissed by Mr E.
The first instance Employment Tribunal found that Ms B had suffered discrimination on the grounds of her marital status, because Mr E had sided with Mr B in the divorce and had, at Mr B’s behest, treated her less favourably. Mr E appealed this decision to the EAT. The EAT said that the key issue was whether the fact Ms B was married was the cause the less favourable treatment as opposed her marriage to Mr B specifically. The EAT held that the Tribunal had not considered the appropriate hypothetical comparator (as required under statute), namely someone in a close relationship with Mr B but not married to him. The Tribunal should have determined whether such a person would have been treated differently. The EAT found that was not the case, and therefore allowed the appeal “with a very heavy heart”, noting that “Ms B was very badly treated”.
Cases of discrimination on the grounds of marriage or civil partnership will remain rare. There is a narrow scope of protection, reinforced by the EAT in this case. Perhaps Ms B would have had a better chance of succeeding in her claim if she had pleaded sex discrimination as an alternative.
In any event, defending Employment Tribunal litigation can be a significant a drain on financial resources and personal time, especially when personal relationships are involved. Unlike Family Court proceedings, Employment Tribunals are public, and judgments are freely available online, which means that regardless of whether claims succeed, they can have a negative impact in terms of reputation and might be used to add fuel to the fire where the personal aspects of family proceedings are concerned, as well as damaging value.
What can be done to minimise risk? The use of Settlement Agreements
One potential course of action in circumstances where there is an employment relationship between separating couples, which can help to limit the legal liabilities associated with the termination of employment, is the use of a settlement or compromise agreement. A settlement agreement is a legally enforceable contract under which a company might agree to pay an employee a sum of money in compensation for the termination of their employment. A settlement agreement often contains several terms addressing issues such as confidentiality and post termination restrictions. Most importantly, settlement agreements are drafted on the basis of there being a clean break between the parties – limiting the ex-employee’s ability to take the company to court or a tribunal (so far as is permitted by statute).
Settlement agreements are complex documents and anyone who is offered one must take legal advice on the impact of its terms, however when properly drafted and mutually agreed, they can offer a practical solution in circumstances where parties no longer feel able to work together, perhaps because of divorce.
Navigating the breakdown of a relationship is invariably challenging and where there is a potential impact on the operations of a business and working relationships, there will be further legal implications to consider, as discussed in this article. The best course of action will require a careful consideration of the circumstances and Burges Salmon, as a full-service commercial law firm with top-ranked employment, corporate and family law teams, is well placed to provide comprehensive advice on all the legal issues that may arise on a family breakdown, including those regarding the family business.
Article written by Alison Hawes (Consultant) and India Jenkins (Senior Apprentice Solicitor) in the Divorce and Family Team.