Corporate Partner Chris Dobson and Family Law Partner Paul Linsell discuss a key and often overlooked issue for shareholders which has come into play in a big way on our television screens this week.
I’m a huge fan of the quite brilliant tv show, ‘Succession’ and like many others was left aghast as the final scenes unfolded in the season 3 finale this week. The storylines between the individual characters are always played out against the backdrop of huge corporate deals and as someone working in M&A, I find the whole package pretty compelling viewing.
In the best interests of anyone reading this who also watches the show, I should say now that I’m about to talk about the series and the latest episode in particular in a bit of detail so spoilers lay ahead….
As an incredibly quick overview, Logan Roy is the domineering patriarch of the immeasurably wealthy Roy family who own a majority stake in the international media company, Waystar Royco.
Logan is the CEO and at the start of the series, it’s known that he’s expected to stand down and pass control onto his son, Kendall. Naturally things don’t go to plan and the series unfolds into an internal battle between Logan, his four children and various other players and investors for control of the company.
At the end of season 3, Logan has reached the conclusion that none of his children are worthy of stepping into his shoes and that the best play is to now sell the company. Learning of this development, the children join forces and plan to block the sale by utilising a “super majority” right of veto to block a sale of the company that their mother had negotiated for them as part of her divorce settlement with Logan years previously. However Logan, always one step ahead had already got to his ex-wife and re-negotiated the terms of their divorce in her favour to ensure that the right of veto was removed therefore clearing the way for the sale to go through.
As a corporate lawyer, my immediate reaction to this is to wonder how a right of protection afforded to a group of shareholders could be instantly removed unilaterally without the consent of the shareholders in question or at least pursuant to a wider shareholder vote, surely this provision would be entrenched within the company’s constitution or set out within a shareholders’ agreement to which the children were all party?
These points aside, watching the episode develop and the sudden importance that the breakdown of a marriage from many years ago now had on a major corporate transaction, I immediately thought of my new colleague, Paul Linsell, and a conversation we’d had recently around the importance of business owners and shareholders taking steps to ensure that their interests are protected in the event of the breakdown of their relationship with their partner.
Paul astutely pointed out that whilst it’s common place to consider the implications on a business when a shareholder dies i.e. compulsory share transfer provisions to ensure that the shares can come back to the company or the remaining shareholders, the reality is that actually, statistically it’s far more likely that a shareholder will go through a divorce and this is something that could carry significant implications for the business and the other shareholders if overlooked. Again, compulsory share transfers can come into play in the event that a former spouse is a shareholder but this is potentially only one element to consider and address…..
Sadly, Succession has yet to find its way onto my television watch list. This is something I intend to remedy once I gain control of the remote from a three-nager who insists on always watching Peppa Pig or anything with dinosaurs in it (ok, I admit, I quite like the dinosaur shows).
However, even without seeing the show, it is of no surprise to me that the combination of a divorce and a family company has resulted in difficulties and some dramatic viewing. While the storyline of Succession is perhaps beyond the realms of what could happen in real life (as Chris says, the unilateral removal of the rights of third party shareholders is beyond the reach of even a family court on divorce), there are many pitfalls for all involved with a company when a shareholder or director of the company goes through a divorce.
Business assets, whether in the form of shares in a limited company, an interest in a partnership or LLP, or those of a sole trader, will be considered carefully on divorce. Not only will the asset need to be valued and taken into account as part of the overall assets of the marriage, but it will also need to be considered as a resource that produces a future income.
At best, the divorce is likely to be disruptive to the business. There will likely be the need for valuations, information requests and the opening up of the company’s books and what would otherwise be confidential material. All of this will take up valuable management time and distract from the day to day running of the business, as well as the obvious impact on the performance of the individuals concerned. However, the situation can become even more complex, and potentially messy, where the shareholdings in the company are owned primarily by family members, potentially including (or even exclusively by) the two parties to the divorce themselves. This is a common occurrence, often as a result of good intentioned tax advisors having encouraged shares to be divided between spouses for tax advantages. However, far too often there will be little or no consideration given to what would happen in the event of a divorce. The result can be a drawn out and expensive process on divorce. There is the potential for shares to be transferred or, in exceptional cases, for a business to be sold. Whatever the outcome, the likelihood is that the business will suffer.
The good news is that with proper consideration and advice it is possible to plan ahead and prevent many of the problems that can arise in these circumstances. The key is to obtain family law advice at the outset so as to understand what could happen if there is a divorce.
A holistic approach of blending that advice with the usual corporate law and financial advice is sensible, so that the company constitution, shareholders agreements, partnership agreements or other business arrangements have addressed the issue. In tandem with that, pre-nuptial (or post-nuptial) agreements should be in place that clearly state what is to happen with the business in the event of divorce.
Where there are multiple business owners, a sensible approach would be for the company’s constitution to require all owners to enter into such agreements. It could even be possible for there to be a right for other business owners to see and comment on these to ensure the business is protected. By taking these steps, the business can be shielded as far as possible from the impact of a divorce and, hopefully, scenarios such as that seen in Succession will easily be avoided.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.