Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I represent Mills Oakley’s Private Advisory Team.
So we’re here at Season 4. The start of a new season of our podcast and this season we are going to shake it up, yet again. We will be continuing with the interview format that we found has been very successful and received a lot of good feedback over the last few months but this time I am going to be interviewing of the best lawyers in the country to wit my business partners at Mills Oakley.
Now, as a private advisory lawyer I work very closely with business owners, but of course, I don’t have all of the answers for them and what they very often need is a broad range of legal advice and skills ranging from the succession planning and the corporate law that people like myself look after but also through to things like tax, family law, litigation, property etc. So how we roll for these clients is that we are able to bring the absolute experts in those disciplines to the table and make sure that they have got the right advisory team around them.
So on that note I thought I would bring in some of these lawyers and we could talk in a bit of detail about how they see the world and the advice that they give to business owners in relation to some of their most important issues.
First up, we’ve got one of Mills Oakley’s family law partners and I’ll make her blush by saying she’s one of this country’s preeminent family lawyers, Helen Suke. Welcome Helen.
Helen: Hi Martin. Thank you for having me here today.
Martin: Oh look it’s an absolute pleasure Helen. Now Helen and I have worked very closely for many years helping business owners and when you hear family lawyer you might kind of think of a hatchet face, kind of court lawyer, who’s in there and you know litigating hard and suing and all of that stuff and of course that can happen in the family law context and particularly when business owners who often got significant asset pools divorce or separate but how Helen and I work much more commonly is on the constructive side. It’s really around setting things up right for the business owner and his or her family so that problems and issues are avoided later down the track.
So, Helen from family law perspective, out of the business owner clients that you advise, what would be sum common concerns or issues that they face?
Helen: Ok, the most important issue is forward planning which is what you said at the outset Martin. There are lots of measures that can be put in place to make a family breakdown either of the business owner or one of their children that may be involved in the business less problematic but those actions really need to be taken right at the beginning. They’re not actions that can easily be taken on the eve of a relationship breakdown and in fact, if structural changes are made to trusts and companies at that point in time the Family Court has enormous overarching power to reverse those transactions. When you talk about that most commercial lawyers are quite shocked (Martin laughs) and they say “how can the court do that?”, but there is specific provision in the Family Law Act that if a step is taken with the object of potentially defeating a party’s claim the Court will reverse that transaction.
Martin: Wow, so the Family Court can really kind of smash through what we as lawyers and business owners would think of as robust.
Helen: Absolutely, absolutely and that that’s probably the the greatest message is that in the corporate world the whole reason we set up companies and trusts is so that those entities sit separately from the natural people that are behind them but the Family Court lifts the corporate veil and effectively if you are in control of any of those entities it’s considered that the assets of those entities are literally in your pocket and are able to be divided. So all the structures that we think are normally safe are not necessarily safe in terms of a property division.
Martin: So for those business owners out there who might have the slush fund, they might have the separate hidden real property, share portfolio, watch out.
Helen: But that, that’s a slightly separate issue but hidden assets are something that the ramifications for failure to disclose in the Family Court are huge as well but that primary issue of making sure that your structures are created with an eye to a potential breakdown. I mean none of us would wish that our own relationships would breakdown, we certainly not wish that for our children but like all things in life, we take out insurance because things that we don’t want to happen do happen and this is just another form of insurance, making sure that you’re structures are structured in a way that will minimize the risk to the business and to all parties involved in the business if there’s a relationship breakdown.
Martin: Thank you Helen.
So thinking about the work that I do with my business owner clients they’re often in their 50’s, 60’s and 70’s and many of them want to transition inter-generationally. They want to give or sell the business to son or daughter and I’ve got to say it’s a very very common issue that I see that they want to do it, the kids might be ready, willing and able to step up but they’re worried about daughter’s marriage or son’s marriage.
Martin: And it might be a real and actual concern right here, right now or it might be just what I would call realism, you know, you’ve got three kids and if your three kids are working in the business, I mean as I understand it one of them is going to get divorced.
Helen: Correct, yeah.
Martin: So it’s certainly an issue that we find is of concern to our clients. So, I mean, say if I was that business owner Helen, what would be some of the options or strategies available to me to mitigate that risk in the context of the family business transition?
Helen: Look Martin, as you know from the work that we’ve done together with private clients and particularly with family groups there isn’t a once size fits all so there isn’t a magic formula that follow this formula and that’s what will work. You’ve really got to look at each individual family group and how they’re structured and, work out what risk they’re wanting to protect against and to what extent because like all things in life there’s swings and roundabouts so the issue in the Family Court is always in relation to control. So that means that control has to be relinquished to some extent which means there has to be other trusted people that can take on those roles and as you and I know Martin, in some family groups it can be difficult to find somebody else who has that high level of trust that can be afforded a directorship or to be the appointor of a trust. So there are multiple issues but I suppose the fundamental one is when the courts are looking to assess control it will look at if there’s a corporate trustee, obviously if you’re personal trustee you’re in, but if you’re a director of a corporate trustee and you’re the single director it’s yours. If you’re one of two directors that it can be shown that you are the director that is the mover and shaker and you call all the shots that will be determined to be de facto control that’s in your pocket as well and of course the appointor of the trust is ultimately the controller. So you might say ok I’m the director and yes I might call the shots but I’m not the appointor so at any point the appointor can hire or fire me so that that diminishes the control argument as well but you’ve got to be careful as to who the appointor is. Now most trusts tend to have a single appointor. The safer way to go is to have multiple appointors in that they have to act in concert but of course that requires a degree of trust and co-operation. So that’s why it can’t be a one size fits all, we’re better to look at the individual circumstances of that family group and work out what’s best for them.
Martin: Yeah, thank you Helen.
So look, you mentioned a number of technical terms there around trustee and appointor and the like but to kind of to bring it back to basics is this right, it’s really just this principal that if you control an asset it’s in the pool…
Martin: It’s exposed to a claim by your spouse…
Martin: But if you do not control it, then it’s safe quote unquote…
Helen: Well, yes, but it’s…
Martin: From such a claim.
Helen: Yeah, it’s not as pure as just legal control.
Helen: So, but if it can be shown that even though there are three directors that you’re the one that calls all the shots the court can still find that you have de facto control. So it’s a little bit more subtle and they’re the sort of things that commercial lawyers say why the hell is that possible and accountants too because we set up these structures with the idea that we’re divorcing them no pun intended you know (Martin laughs) from the actual people but it may not quite have that affect.
Martin: Yeah, so, so one example might be a business owner comes into the office and he says well look I’ve, I’m getting divorced but don’t worry all of my assets are in a family trust I don’t personally own them and my brother is the trustee.
Martin: What do you say to that? (Martin laughs)
Helen: That’s good, that, that, that’s a happy result and I must say Martin that when I receive a new client and they bring all of their documents in and I can see those sort of structures it, it’s good because it really does help us in terms of the settlement and the negotiation. So of course, there’ll be an analysis of whether the brother is actually the one call the shots…
Helen: Or whether he’s acting on somebody else’s instructions. Yeah.
Martin: And this was what I was trying to get to because I mean you’re right it does kind of look good and maybe it’s robust but a suspicious person would say ..
Helen: Yeah, a good family lawyer
Martin: Yes, (Martin and Helen laugh) ok, correct, a suspicious and good family lawyer would say nuh, nuh, you know, you’re standing behind the brother and you’re pulling the strings.
Helen: Yeah, they’re a puppet.
Martin: Yeah and it’s this dynamic that I find so fascinating it’s a continuum isn’t it? But you know, on one far end there’s absolute control and on the other end there’s no control and the position I would imagine is reasonably clear at either of those ends of the spectrum.
Helen: At the extremes yes Martin but most fall into that massive grey middle ground, yeah.
Martin: Yeah and then it’s really if you’re a family business owner looking to structure yourself appropriately and assess these matters it’s about degrees of risk isn’t it? You know and how much risk you’re willing to accept.
Helen: Or whether it’s even workable.
Helen: I mean the idea of having three appointors, great if everybody gets along well but if you’ve got three people that don’t get along that, from a day to day basis, that’s a logistical nightmare and you’ve got to weigh up that inconvenience against the risk of a relationship breakdown. Yeah.
Martin: Yeah. So you’ve, you’ve mentioned the appointor a couple of times. Just for those who are listening who might be unfamiliar with that term could you explain it?
Helen: Yeah. The appointor is the person you read through your trust deed and it will have usually a schedule in the back and it will give the name of the appointor. The appointor is the person who can hire or fire the trustee so that’s why they’re seen as the person with the ultimate control. So that’s usually the first thing that we look for in a family law matter and then you sort of go down the chain if there is a corporate trustee. So if there’s a trust sorry a company that is the trustee then you look at the directors of the trust next.
Martin: Yeah. So if I’m the appointor of my trust that’s a pretty kind of good sign that I control it.
Martin: And therefore…
Helen: The court will just..that’s a lay down misére, (Martin laughs) yeah.
Martin: Yeah. Alright. Well look, thank you for that, I mean that’s a fascinating subject around who controls the family asset pool and how that that might affect a family law settlement. The other thing that is really top of mind for me and I’m sure our listeners will be very interested to hear about is the question of pre-nups or as I understand they are called these days binding financial agreements.
Martin: Now, do they work? (Martin laughs)
Helen: There’s an interesting argument Martin about in the Family Law Act they’re called financial agreements (Martin laughs) and there is an argument about whether we should call them binding financial agreements because of course.
Martin: No one will say that they’re binding.
Helen: Well you know the, the court determines ultimately whether they’re binding. There’s been a lot of press in relation to these agreements, they came into being in the year 2000 so they’ve only been around for 16 years. I know that sounds like a long time but you know most people when they enter a relationship hope that it’s going to be a lengthy one and so we’ve probably found in the last 8 years or so that there are more matters coming before the court where these agreements are contested. There are some lawyers around the country that have formed the view that there is significant risk in advising clients in relation to these agreements, they’re complicated documents to draft. I’m still of the view that they certainly have value. The client has to understand the scope of protection that can be afforded by them and I think you are much better off to have an agreement than to not have an agreement. I think that’s without doubt. The agreement can be entered into either before a relationship is entered into this is de facto or marriage, same sex as well. Before a relationship’s entered into during the relationship or after the relationship and it sets out how the parties intend to divide their assets, liabilities and resources in the event of a breakdown but the agreement also requires the parties to disclose one to the other as to their current financial position. So even from a point of having a very clear record that both parties have signed saying this is what I owned at the start is a terrific document to have.
Martin: Yeah. So say if I’m a business owner, I you know I might, I might be in my 60’s, I want to transition to my son who’s in his 30’s. So I could just write one of these up can’t I which kind of cuts out the daughter in-law, you know it says that, you know, all of the assets will be my son’s you know. And we could get her into the office and get her to sign it yeah?
Helen: Yeah, yeah that’ll make it really easy wouldn’t it Martin? (Martin laughs) Ah the difficulty with that scenario is each party needs to receive independent legal advice and their lawyers need to sign a statement each which is generally annexed to the agreement to prove that that advice has been given and generally most prudent lawyers give that advice in writing and the advice will often run to 10-12 pages in length. Ah, so without that advice the agreement would be swept aside by a court. It’s fundamental to the binding nature of the agreement.
Martin: Ah, so we can’t, we can’t just kinda wheel the spouse in and dangle something under his or her nose. (Martin laughs)
Helen: No, no the classic story and this has happened often is, literally the bride is stepping into her dress and you know mother in-law runs in and says “by the way can you just sign this”. That agreement would, it’s of no weight whatsoever. Yeah.
Martin: And tell me about that because I find this aspect fascinating as well. There’s, I mean I don’t know if duress is the right word but this is one of the ways to pierce or attack these documents isn’t it?
Martin: It’s to say that undue pressure was put on me.
Martin: So, yeah, for example, the day before the wedding or when we’ve sent out the wedding invites …
Martin: … and it’s locked in and the bride or groom feels that they’ve got nowhere to move or no options.
Helen: Yes, that’s absolutely correct Martin. We have to be very careful with these agreements, as we were saying at the beginning of our program that these agreements need to be prepared at the earliest opportunity and certainly in relation to a wedding, you want to be doing it well before you’re at the stage of invitations going out otherwise it’s easy to mount a duress argument because of the public embarrassment, of you know, what do you do? If you don’t like the document you sign it or you call off the wedding and cancel the 150 guests?
Helen: Yes, that’s a place that a good family lawyer would not allow their client to go. Yeah.
So a common issue that we see with business owners and their children is that they do like the idea of a financial agreement. I won’t say binding or a pre-nup but it’s an incredibly difficult conversation to have. I mean do you have any kind of hints and tips for our listeners about how they might raise some of these sensitive issues?
Helen: Yeah, yeah, I do. The most, the most critical issue is that it must be early so, ah, it’s something that needs to be raised well before an engagement or well before people move in together.
Helen: People often say oh it doesn’t matter…
Martin: Maybe at the second date. (Martin laughs)
Helen: …Well, not by the second date it is tricky Martin. (Martin laughs) It’s like Wills, you know none of us ever want to think about it coz we don’t think we’re going to die. But it is something that needs to be raised early and I suppose the hallmark of an excellent financial agreement is if the agreement is well balanced, ah, it’s more likely to be upheld by the court but if you’re trying to draft an agreement and it just says that’s it, cut it out, particularly for a very young couple who intend to have children and one party is going to spend time out of the workforce, caring for that child and it might be either party. It’s very difficult to crystal ball particularly when you’re giving the client the advice. You have to advise of the advantages and disadvantages of entering into the agreement and the effect of the agreement. So that requires a family lawyer to think forward 10, 20, 30 years and project how that client may or may not be advantaged, disadvantaged or what the effect will be. So it’s difficult but if it’s a situation where you’re wanting to quarantine a family business interest, quarantine an inheritance, quarantine certain assets that each party might have accrued prior to their relationship and then have really sensible provisions as to how you would deal property that the parties will then acquire together. I think those agreements are very worthwhile. You know so you’re really excluding what’s important and then you’re making provision that as the relationship develops and lengthens you know, say, that you might buy a property you might then make provision that whoever’s name that property’s registered in, despite who’s contributed financially to it, you intend that property to go with that party. Then you’ve got, you’ve got a real sense of equity and justice and it’s clear as to what the intent was. They are the best form of agreement. Yeah.
Martin: That’s great advice Helen. Because as you say if it’s quarantining a family business interest that’s been in one family for generations or if it’s saying well if, if you know, Aunt Edith dies …
Martin: … well that inheritance comes to me. That, that feels to me to be a reasonable position. Not that I’m going to snaffle 100% of the asset pool. You know come what may.
Helen: Because what will happen Martin and the case law bears this out, the judges in the Family Court have an over-arching obligation for settlement to be just and equitable and that justice and equity flows strongly through the veins of the court and if a judge can see that you know the agreement just wipes everything out for one party, my view is and the case law supports it that the judges will work very hard to find a reason to sweep aside the agreement so that a just and equitable settlement will then be granted through the court. So sensible and if the primary effort is to quarantine an interest in a business particularly when there are other family members that’s a really sensible and sound reason to draft an agreement and its imperative that that agreement is well balanced because you want it to be upheld.
Martin: That’s great Helen. Thank you.
So, hey, I now wanted to turn to the question of not so much transitioning to the children but simply if they were a couple, married or de facto who run a business together and certainly and sadly in our practice we’ve seen many times that a couple have grown and built a successful business together and then they split up and there’s often now a very big asset pool that they not only co-own, but co-run.
Martin: How do couples navigate that situation?
Helen: Yeah. That’s a great question Martin but it probably throws up multiple other questions. So your first issues that you need to grapple with are the practical issues. Whilst the parties have separated in their personal life you have to assess whether it’s possible and/or practicable for the parties to continue running the business. Sometimes that is possible particularly if it’s not an overly acrimonious breakdown of a relationship and if the parties have built this business up from scratch and truly want to see that business continue parties can find a way of running the business together whilst their sorting through their property settlement. Generally that works well when there’s a fairly clear division of responsibilities within the business that is possible. However, more often than not parties can be so enmeshed in the way they run the business that it’s not possible for them to continue doing that. It has fallout for staff, it has fallouts for their clients because of that tension just flows right through the organisation and if that’s the case then the only practical step to be taken and sometimes it requires the courts’ intervention if there’s not consent is for one party to assume the overall conduct of the business whilst the property settlement is being worked through. Now of course issues such as cashflow, payment to the other side, all have to be navigated to try and ….
Martin: The business is often the biggest asset, right? Yeah.
Helen: …The business is more often than not the biggest asset or you’ll find all of the real estate is securing the business as well.
Helen: So you can’t untangle anything. So it’s imperative that the business be preserved and it takes common sense advice from family lawyers on both sides to make that happen because you really want the best outcome for everybody. There’s no point guesstimating an asset pool and there’s no point decimating a business. Nobody wants that. So it’s important to work through the practicalities and then after that step of course the next stage is valuing the business and that is a significant task there are accountants who are well qualified in this area. There are various methodologies that can be used to value a business depending on the type of business and how it operates, I won’t go into all of that now Martin, that’s a whole other topic (Martin laughs) but you need to come up with a valuation because then you’ll plug that valuation into the asset pool before you start working out the division might be and and that process can take some time.
Martin: Hmm, that’s a brilliant point about not kind of killing the golden goose …
Martin: … and I’ve seen this in family law where the former spouses can be very, very aggressive and confrontational and there’s a great big fight over the asset pool but when we’re talking about that asset being a private business as you say with customers and staff and perhaps dependent on the personal goodwill in relationships of the owners that can be an absolute disaster …
Helen: It can.
Martin: … nobody wins out of that.
Helen: It can and again, a sensible and prudent family lawyer if they’re acting for the client who can’t stay in the business needs to counsel them as to the advantages of the business continuing because it’s a win/win for everybody.
Martin: Yeah. Thank you. I’ve got one final question for you Helen and it relates to co-owned businesses. A number of our clients would be a shareholder or a partner in a business. There might be two or three shareholders in there and again the chance of one of those two or three shareholders going through a matrimonial breakdown pretty high and it would be very scary I imagine for the one who’s not going through that, to think, well look how’s this going to affect the business, how does it affect me and for example, will the business be geared up to pay out the ex-spouse of my business partner. What would you say to somebody in that position?
Helen: That‘s a question that is being put more and more commonly and I will often have clients who will come to see me not because their relationship’s in any difficulty but they’re concerned about a business partner’s relationship and wanting to know what their obligations are or what their risks are? Usually the first questions are when it comes to financial documents that have to be handed over, you know, do I need to hand over documents? The answer is generally yes, but sometimes third parties need to be separately represented in proceedings and often they need to be parties to any agreement that’s drafted because if the company needs to be bound whole to undertake certain steps in relation to the settlement then the company needs to be joined to, even if the orders were made by consent the company needs to be joined so yes, if you’ve got a business partner who’s relationship is under any pressure that’s something you really want to turn your mind to.
Martin: Wow. That’s so interesting. I’m thinking about the drafting of shareholder’s agreements which we do regularly as corporate/commercial lawyers and often in those documents business owners are very, very focused on the what if’s around what if one of us dies or what if one of us suffers total and permanent disablement and how are we going to fund the exit at that point. Will it be insured, etc. But it seems to me that in the short to medium term the, actually the chances of a matrimonial breakdown would be much higher than death or TPD.
Helen: Correct. (Martin laughs) I mean the sort of things that could be considered in those documents is, you know, how a business might be valued. Now that may not necessarily be binding but it would be great to at least see that the business owners have turned their mind to that…
Helen: …Because often there will be valuation processes that are imbedded in the document in relation to the death of a business partner. I mean the court would obviously ultimately have the overriding, you know authority for that but yet those conversations should absolutely be had.
Martin: That’s great Helen. Thank you so much for joining me. It’s been fascinating kinda walk through some of the hot issues in family law as they pertain to business owners.
Helen: Yeah, thanks Martin. Just one last note also make sure that Wills for the business owners reflect the decisions that are made about protecting the business as well as sometimes that can be forgotten and then somebody can pass away in the middle of family law matter being determined and what was protected might then just fall into somebody else’s hand inadvertently because of the operation of a Will.
Martin: Oh Helen, you know I always like a plug for the Wills lawyers. (Helen laughs) I am most grateful for that. But you know, what again what a great example that our clients issues and problems do not fall into neat silos.
Martin: You know, life and legal issues are complex and they are multi-disciplinary.
Helen: They are.
Martin: And that’s I guess why we enjoy working so much with professionals like you Helen, so thank you very much.
Martin: Next time we will be speaking with Lisa Anaf who is one of Mills Oakley’s Employment Law partners and she’ll be sharing a number of insights about employment law issues for business owners.