Pre-nups: questions of protection

Pre-nuptial agreements are commonly talked about in relation to wealthy individuals where there is a focus on protecting the individual’s wealth. However, in relation to a family business, separation or divorce can impact on both the individual and the business, which may be required to fund a significant capital payment to a separated spouse. A pre-nuptial agreement can provide a degree of protection to the family business as well as to its owner.

Unlike a separation agreement, in a pre-nuptial agreement there is no heads of terms. Prior to drafting a pre-nuptial agreement, the following need to be considered:

• the objectives of the agreement for both the business owner/wealthy individual and the less wealthy other party;
• the contingencies the agreement should cover;
• the impact of the legal provisions;
• the risks of the agreement; and
• the details/clauses to be included in the agreement.

Objectives: protection

With a family business owner, the objective is to provide protection to the individual’s assets/investments acquired prior to the marriage, which have flowed from their interest in the family business. During the marriage there may well be a restructure of the business as it moves from a sole trading business to a limited company, and what was previously not matrimonial property could due to restructuring become matrimonial property. One of the primary objectives of the agreement is to ensure this does not occur.

The benefits to the other party signing the agreement should be considered. If you are advising the wealthy individual, consideration could be given to transferring the family home into joint names on marriage, or making payment of a significant capital sum. Reflecting that in the agreement provides a benefit to the less wealthy party. It may also go some way to allaying the concerns of the solicitor advising that individual.

The purpose of a pre-nuptial agreement is not to address the inequality of wealth, but to protect the wealth acquired prior to marriage and to protect the family business.

Contingencies: death?

Should the agreement cover separation and death, or simply separation? Ordinarily, it would be separation. However, if your client is owner of a business and a shareholder in the family business, the shareholding would form part of their moveable estate. In the agreement, it may be prudent for the couple to discharge their legal and prior rights, otherwise the shareholding may form part of a claim on the estate, which could have implications for the business. If you do not exclude the shareholdings from moveable estate, you are not protecting the owner of the business or the family business.

Whilst this could set up a potential challenge to the agreement, the Family Law (Scotland) Act 1985 focuses on sharing assets built up during marriage through the income and efforts of the parties. As the interest in the family business has not been built in this way, this would allow you to push back on any challenge.

Law of financial provision

In drafting the agreement, consider the five principles for sharing of matrimonial property in terms of s 9 of the Act.

A fair sharing of matrimonial property involves identification and valuation of assets at the date of separation. In the absence of an agreement, assets acquired during the marriage except by gift or inheritance would be matrimonial property. With the presumption of equal sharing you would be left with a special circumstances argument, which might or might not be successful. It would be highly unusual on separation to receive credit for 100% of the pre-marital asset investment. As the marriage continues, you have to account for the economic advantage and disadvantage, and the burden of caring for children, as well as any loss of financial support on divorce whether this be for a short period of time or whether it could result in serious financial hardship.

The issue of resources is often overlooked in proposals to reach an agreement. Consideration should be given as to whether in the agreement a pre-marital asset should be excluded from resources. It could be argued that this might form the basis for challenging the agreement as not being fair and reasonable in terms of s 16. However, parties are free to contract; it is a question of balance.

Once a couple marry, they have an obligation to support each other financially. This is different from the principle of continuing financial support. It is important to advise the client of the obligation to aliment and to take account of the grounds for divorce. If your client has to wait two years before being able to raise a divorce action, there could be a period of between two and four years where the wealthy spouse requires to support the other financially.

Risks of an agreement

There are all sorts of reasons an agreement can come unstuck. It is difficult if not impossible to draft a solid, watertight agreement. The benefit of the agreement is that it provides a degree of certainty, but that certainty is not absolute.

Consider the limit of your firm’s insurance cover. The wealth of your client may exceed your insurance cover. It is essential in any letter of engagement to limit the extent of your liability.

Scots law will accept a pre-nuptial agreement, whereas the English courts treat such an agreement differently. There is always a possibility, taking account of the wealth of your client, that on separation there is an attempt to litigate a financial award in England, if there is an English connection. However, in view of the recent decision in Villiers [2021] EWFC 23 this is now less likely.

Financial provision on divorce is set out in ss 8-14. Should you exclude those provisions? If you were intending to do this, you would have to set out what would occur on separation. My view, unless you intend to set up an alternative framework, is not to exclude the statutory provisions. To exclude those provisions may well represent the basis of a challenge to the agreement. A challenge may be more likely, and because of the unusual nature of such an agreement, may well be more likely to be successful, particularly if there has been a long marriage.

Legal challenge: fair and reasonable?

A pre-nuptial agreement can be challenged any time up until divorce on the basis that it is not fair and reasonable. The principles a court will consider are set out in Gillon v Gillon 1995 SLT 678:

• The agreement will be examined for both fairness and reasonableness.
• Examination will relate to all relative circumstances leading up to and existing at the time of signing the agreement, including amongst other things the nature and quality of legal advice.
• Evidence that an unfair advantage was taken by one party may have a bearing on deciding whether the agreement is fair and reasonable.
• A court is not unduly ready to vary or adjust an agreement which has been validly entered into.
• The fact that the agreement has led to an unfair or unequal division of assets does not give rise to an inference of unreasonableness.

The actings and behaviour of both parties will be considered. Taking legal advice is not enough; the quality and nature of the legal advice will be scrutinised. It is essential that the other party is given an opportunity to take legal advice. The agreement is primarily to provide the wealthy client with protection. Accordingly, it is only appropriate that the reasonable legal costs of the other party requiring to take independent legal advice should be met.

You may be asked by your client to recommend another solicitor who can legally advise the other party. Bearing in mind the decision in Murray, Petr [2019] CSOH 21, the other party should not be influenced on the solicitor from whom that person takes advice. However, on the basis that the quality and nature of the legal advice will be considered in a challenge, the solicitor consulted should have a knowledge of family law matters.

Jurisdiction

There should also be considered which country would decide or which law would apply in the event of separation. Depending on where the parties live, or subsequent to separation, there may be other jurisdictions that will be entitled to decide on matters. The consequences of Brexit are not known. For example, your client and spouse live all their life in Scotland, but after separation one of the parties moves to France. The spouse in France raises divorce proceedings. Your client raises divorce proceedings in Scotland. Scottish courts may deal with a forum non conveniens argument; however, the French court may regard the dispute as a matter for French law. Some continental countries regard being first in time with proceedings as the determining factor. The French court may deal with the divorce in parallel to the Scottish court.

Including a provision in the agreement that any dispute will be determined by Scots law may not guarantee the position, but it may well influence it.

Cross-border issues

If you are acting for a client who has a connection with Scotland and England you may wish to consider having agreements prepared in both jurisdictions. I appreciate there is a costs issue, but if your client is of significant wealth, and the family business is of significant wealth and importance, the benefits may well outweigh the costs.

Hopefully, with these factors having been taken into consideration, the preparation of the agreement with the usual clauses of separate property will ensure that when you move from a blank sheet to a final agreement, you have an agreement which achieves its objectives, provides certainty, is fair to both parties, and is less likely to be challenged or, if challenged, for that challenge to be successful.