In the case of Shield v Shield and Shield, family loyalties (and fortunes) were at stake
My attention was drawn to a sad divorce case which highlights so many issues that can go wrong with the transmission of wealth, in particular with family businesses.
I will spare you the learned debate about promissory estoppel and constructive trusts and look at the practical family issues. Nobody came out of this, to me, as a bad person, but it is clear that the family members themselves would not share that analysis. And worse, it arose because a family company was brought back from almost terminal decline and is now very profitable.
If the rescue had failed, as the judge observed, there would have been nothing to fight over. The case is called Shield v Shield and Shield.
The husband and wife had three daughters and one son, the son being the third of the four children. Back in 2002, the family engineering company was turning over about ’11 million but the profit was just over ’3,000. It was being run by the husband and wife, and the husband's sister was also a shareholder, since they had inherited the company from their father.
The upshot of the family discussions about the parlous state of the company was that the son (then in his early twenties) left his job in London and came back with his partner, later his wife, to re-energise the company. By 2011, the company turned over almost ’76 million with a net profit of ’5.7 million.
The son had wanted rewarding for taking the risk of leaving his previous job, and a company restructuring left him with an increase of his shareholding from under 1 per cent to over 50 per cent, although the husband retained voting control. As part of the restructuring, the husband agreed that, by his will, he would leave his shareholding to the son, who would then have scooped the pool. The husband indeed changed his will to honour that commitment.
But then, in 2012, the marriage broke up after more than 40 years. The husband conceded that the division of the assets should be on a 50:50 basis but said that his shareholding should not count as an asset of his in the division. The wife disagreed and the court held in her favour on the basis that, although there may have been a commitment, you could test whether the assets really belonged to the husband by asking the question whether, if the husband had gone bankrupt in his lifetime, the creditors would have been able to claim against the value of the shares. They clearly could.
There were a number of interesting sidelights which came out. The son's elder sisters, who gave evidence, were obviously vexed that their brother had become so wealthy compared with them. The judge said it was sad that they did not feel able to give the brother credit for what he had achieved. But it was more than being bypassed on the wealth front.
Their evidence indicated that they were confident that they could have done just as well as, and indeed better than, their brother. It seems that the wife had gone along with the decision to give the son a chance back in 2002, but the world today does not favour male primogeniture, which might well have been an influence in the thinking those twelve years ago.
Emotional tension in the case was so high that the judge stressed that he took his reading of what happened from the documents he could rely on, rather than from the parties' written or oral evidence. The husband, in particular, seemed to be prone to changing what he said dependent on the person to whom he was speaking.
And what of the succession planning? Divorce or not, the sisters would have resented their brother not only for making the money for himself but also for denying them a chance to show what they could have done. As time goes on, this issue in succession matters will not go away — it is no better to assume that the eldest will do better than the youngest than that the son will do better than the daughter. Furthermore, it is apparent that in 2002 the daughters had not been taken into their parents' confidence about the plan. Being ignored can be very damaging to relationships.
Planning of this sort all too easily assumes that life will go on untroubled, when the reality is that something unexpected can, and often does, happen. It really is necessary to stress-test a plan before implementation. An unexpected event can be the trigger for the release of all those pent-up frustrations.
I can sympathise with each and every one of the family members. A generation ago, the husband would probably not have faced a fight from his wife or daughters, but we have a reminder that attitudes have changed and are changing very quickly.