Will a shareholders agreement protect a business from a family law dispute?

The Court's broad powers and discretion

The Family Court operates under the Family Law Act, which empowers it to make orders "altering the interests of the parties…in the property" and to do so where it is "just and equitable." This broad discretion means that the Court is not strictly bound by commercial arrangements if upholding them would lead to an unfair outcome in a property settlement.

Consider the common scenario where a business interest is primarily held by one spouse, perhaps with a meticulously structured Shareholders Agreement in place. While the agreement might outline buy-out clauses or restrictions on share transfers, the Family Court will assess this asset as part of the total matrimonial pool, regardless of legal ownership. This assessment involves:

• Identifying and valuing the asset pool

The business interest, whether held individually, jointly, or through a corporate structure, must be disclosed and valued. This can involve complex valuation methodologies, particularly for private companies or those with unique assets like intellectual property or trailing commissions (as seen in mortgage broking or certain financial services businesses).

A business owner might perceive their business as worth millions due to its lifestyle-funding capacity, but a family law valuation, focusing on transferable value, may yield a significantly lower figure.

• Assessing contributions

The Court will then consider the contributions of both parties to the acquisition, conservation, and improvement of all assets, including the business. This goes beyond direct financial input. Non-financial contributions, such as homemaking, parenting, or supporting a spouse's career, are equally valued. If one spouse's efforts at home allowed the other to dedicate significant time and energy to building the business, this can be considered a contribution to its value.

• Considering future needs

Finally, the Court assesses the future needs of both parties, taking into account factors like age, health, income-earning capacity, and care of children. A disparity in future needs can lead to an adjustment in the division of assets, even if a Shareholders Agreement purports to define specific entitlements.

When commercial agreements come under scrutiny

Shareholders Agreements, partnership agreements, and buy-sell agreements are designed to govern the internal workings of a business and the relationships between its owners. However, in family law, their interpretation extends to how they impact the overall property settlement.

• Enforceability: While commercially binding, the Family Court has powers to set aside or vary agreements if they are deemed unfair or if there was a lack of full disclosure when they were made. This is particularly relevant if a Shareholders Agreement was entered into in anticipation of, or during, a relationship breakdown and could be seen as an attempt to defeat a family law claim.
• "Sham" arguments: In certain circumstances, the Court might look behind the corporate veil to determine if a company or trust is merely an "alter ego" of one or both parties, rather than a genuinely independent commercial entity. If the Shareholders Agreement effectively controls a structure deemed to be an alter ego, its terms might be less influential.
• Third-party involvement: Where a business has shareholders who are third parties (e.g., parents, other business partners), the Court may be reluctant to make orders that would unduly prejudice their interests. However, if those third parties are perceived to have acted in concert with a spouse to shield assets, the Court's powers may extend to binding them to orders, provided certain conditions are met under the Family Law Act. This could involve complex accrued jurisdiction arguments.
• Control vs legal ownership: A key area of scrutiny is the degree of actual control a party exercises over the business, irrespective of their formal shareholding. If a spouse is the effective decision-maker, director, or guiding force behind the business, the Court may attribute a higher interest to them than their strict shareholding suggests, potentially impacting how the business is valued or dealt with in the property pool.

Potential pitfalls for business owners

• Underestimating the Family Court's reach: Business owners often mistakenly believe their commercial agreements offer complete immunity from family law claims. The reality is that the Family Court views the entire financial landscape, not just isolated business structures.
• Poor timing of restructuring: Restructuring a business, altering shareholdings, or changing trust arrangements when a relationship is already "rocky" can be viewed as an attempt to defeat a family law claim. This can lead to adverse inferences and even court orders setting aside such transactions.
• Lack of full disclosure: Failing to provide complete and transparent financial disclosure regarding a business interest, including all relevant commercial documents like Shareholders Agreements, can lead to serious consequences, including cost orders or the setting aside of any agreement reached.
• Disregarding non-financial contributions: Overlooking the non-financial contributions of a spouse to the business's success or the family's well-being can lead to an unjust and inequitable assessment of the parties' respective entitlements.
• Inflated self-valuation: Business owners often have an emotional attachment to their ventures, leading to an overestimation of their market value in a family law context. A realistic, independent valuation from a family law expert accountant is critical.

Proactive strategies for business owners

While no Shareholders Agreement can fully insulate a business from family law considerations, proactive steps can significantly mitigate risks:

• Early legal advice: Seek advice from a lawyer specialising in the intersection of family and commercial law at the earliest sign of relationship difficulties, long before separation. This allows for strategic planning within legal boundaries.
• Review and update agreements: Regularly review Shareholders Agreements to ensure they reflect current circumstances and consider potential family law implications. Incorporate provisions that contemplate separation or divorce.
• Transparent financial management: Maintain scrupulous financial records and ensure complete transparency regarding all business interests.
• Consider a Binding Financial Agreement (BFA): While not a silver bullet, a BFA, properly executed with independent legal advice, can provide a framework for dealing with business interests in the event of separation, offering a degree of certainty.
• Realistic valuations: Obtain an independent business valuation for family law purposes to understand its true value in that context.

In conclusion, Shareholders Agreements are vital commercial tools, but they do not operate in a vacuum when a relationship breaks down. Business owners must understand that the Australian Family Law Courts will scrutinise these documents through the lens of fairness and equity, potentially leading to outcomes that differ from strict contractual terms. Proactive planning and expert advice are therefore indispensable in safeguarding business interests in the face of family law disputes.

Kristy-Lee Burns is a partner at Owen Hodge Lawyers.