Ain't love grand?

Melanie Stern is section editor of Families in Business magazine.

In one client's attempt to protect their business from possible future ownership dilution, Craig Aronoff, a consultant with Kennesaw University-affiliated Family Business Consulting Group, recently had to throw his weight behind an uneasy case. A successor and heir to the family fortune refused his parent's wish to have his fiancée sign a pre-nuptial agreement (usually called a 'pre-nup'). His parents issued an ultimatum: sign it or forfeit any stock ownership in our business. Predictably, it got nasty; the successor's counter-ultimatum was that he would sign  if his father agreed to retire at 65. After some counsel by Aronoff, the contract was eventually signed by son and fiancée, and amazingly, "all is fine... except his wife will not have anything to do with the lawyer involved," reports Aronoff.

It's common for American business families to arrange pre-nups to ensure the family business, or equity, is not up for grabs by spouses on divorce. But somewhat disturbingly, it isn't the 'divorce generation' driving it; lawyers acting on behalf of wealthy families have noted a distinct trend towards elders putting successors and their chosen ones in a position where they are threatened with serious consequences for refusing, such as being cut out of ownership or even succession plans. "Pre-nups should be a matter of family policy applied to all new spouses," Aronoff advises. "If that policy clearly exists, its discussion comes easier and earlier in the relationship's development and is much less personal for the intended spouse."

With one-third of all marriages in England (one-quarter in Scotland) ending in divorce, British family lawyers are being kept busy – and rich – sorting out messy asset separations through the courts. Considering that divorce payouts can extend from property to pensions and on to shares and business equity, marriage can present a real threat to familial control over its enterprise ownership.

Until very recently the Brits thought themselves far less litigious than Americans, but notable examples of costly divorces in the UK, such as that of Premiership footballer Ray Parlour's wife Karen – who in 2003 secured not only a £250,000 cash sum and two mortgage-free houses worth over £1m, but also one-third of Parlour's future income – have the country's wealthy thinking seriously about pre-nuptial agreements, already a staple of US law where some 55% of marriages end in divorce.

Inevitably, forced or not, the whole unromantic issue has the potential to cause arguments. In 2003, gossip columns were aflame with the news that Revlon patriarch and thrice-married billionaire, Ronald Perelman, was said to have vetoed his son Joshua's wedding because he had not had his intended sign a pre-nup (presumably to guard from divorce history repeating itself in the next generation). Meanwhile, his other son Steven reportedly saw off two fiancées who took aversion to the pre-nup proposal his father enforced.

"These days I see clients coming to me worried about giving the next generation power in case their marriages go pear-shaped, and half the family's assets go straight to the spouse," explains Mark Harper, family law expert with private client law firm Withers. "It is the older generation who are keen on the idea of pre-nups, but in my experience the younger generation is more willing once it is explained to them that they stand to lose a lot if divorce ensues."

Harper's colleague and head of private clients, John Riches, concurs. "A few years ago England, was a pretty good place to divorce if you were wealthy – but that has changed now. These days, if assets have been built up and the marriage was of any length, the wife commonly gets half the assets – that can mean half the business, or half its value."

A common structure for protecting family wealth and business ownership is to integrate a pre-nup with existing or specially-created trust vehicles. A family pays an agreed amount into a trust on a regular basis and if a pre-nup is activated, the payout comes from this trust, circumnavigating any dipping into company stock.

If existing trusts have been set up in an offshore financial centre, it is wise to consider signing the pre-nup in that jurisdiction because in places like Bermuda or the Bahamas, marriage and divorce laws are more favourable, lawyers say.

One problem though – pre-nups aren't legally binding in the UK yet, although the legal profession is lobbying to change that. Last November, UK outfit The Solicitors Family Law Association called for pre-nups to be made legal in England and Wales, because of the increasing complexities of divorce courts. But not being legally enshrined does not render UK pre-nups useless, as they are more likely to used as a guide by the courts in divvying up the assets if they stick to three cardinal rules:
Fairness: The division of assets must appear fair and balanced, in accordance with the contribution the courts will deem a spouse made to the family and to any business, either directly or indirectly, for instance by supporting a husband who becomes a successor.
Disclosure: All assets and sources of wealth of the family must be fully disclosed in the pre-nup, to assure the court of the good intentions to share wealth equitably with a departing spouse who is deemed to have made a contribution. "This is often a problem for the older generations, while oftentimes successors do not know the extent of family wealth unless they've seen their family name in The Times' Rich List or a similar source," says Riches. "If you are concerned about the intentions of an incoming spouse, it is worth offering full disclosure even if it is uncomfortable."
Autonomy: Though hard to prove, a court can dismiss as void a pre-nup contract if a defendant successfully argues they were coerced into signing it. To show the court due autonomy, lawyers advise a pre-nup to be signed at least 28 days before the wedding, with each party having independent counsel and at least two witnesses to the signing. As Aronoff says of his client's case: "If there were a divorce, [her] attorneys could perhaps make coercion an issue, but the parents were influencing their son and coercion usually deals with the inaction between the parties to the agreement."

In the age of super-wealthy and high-profile captains of industry (many from family dynasties), wives have become more forthright in claiming their due from corporations where they believe their part in a marriage has had material impact on a company or executives' success therein.

Viacom stalwart Sumner Redstone came away a whopping $3bn poorer after his wife of 52 years, Phyllis, divorced him – but Sumner fought to keep her hands off ownership of the company; however Lorna Wendt, ex-wife of GE Capital boss Gary, rejected her husband's offer of 10% of all joint assets and won $20m in property, cash and GE stock. Lorna argued her contribution to Gary's success was worth exactly half of his fortune, detailing in court how it fell to her to organise relocating the family when his job moved, putting on lavish dinners for executives, and raising their children alone. "My case was never about the money – it was about implying I was a 10% participant in my partnership," she says.

If a spouse has been given a job within the family business, they could be likely to see it as fair that they receive some sort of financial or share-based reward in a pre-nuptial agreement.

William Zabel, principal with law firm Schulte, Roth & Zabel, has represented a string of high-profile divorce cases including two of America's most famous ex-wives, the former Mrs Jack Welch (Jane Beasley) and Nancy Friday, who was married to Time magazine's Editor-in-Chief, Norman Pearlstine. The latter had no pre-nup; the former had one but a 'time-out' clause Beasley had written into it rendered it void after a decade of marriage. Beasley later hired a private detective to uncover the extent of her husband's wealth, after he offered what she thought to be an unfair settlement.

Withers' Riches and Harper point to the cardinal rules of disclosure and fairness set up in pre-nuptial agreements as the clearest way through these landmines for wealthy UK business families, even more so in a marriage of foreigners.

In Europe ex-UK, 'marriage contracts' electing a certain type of marital property are commonplace, allowing wealthy families to choose upfront what assets apply to the marriage and what assets do not – leaving a spouse with little control over anything accrued during marriage. The contract is frequently only one page long and signed in front of a notary, rather than each individual having their own legal counsel present, and full financial disclosure is rare. Most advisers recommend drawing up the pre-nup with counsel from both countries of origin, should a divorce trigger a relocation of one party back home, possibly weakening the agreements.

As the record shows, settlements are rarely clear-cut–owing to the forgoing of the first rule of pre-nups, fairness to the spouse. "There is usually a lot of arguing and trying to escape certain clauses, and spouses frequently want recognition of their contribution to a business through a pre-nup," says Zabel.

However, he concurs, "this is often refused because of the perceived threat to family control over company holdings."