Effective international prenuptial agreements: Asset protection and key issues facing family offices

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Wealth creation in Asia is not slowing down. According to some recent reports, around 85% of Asia’s billionaires are first generation. Over the next 20 to 30 years, we are likely to witness substantial amounts of that wealth being transferred. As ultra¬high net worth (UHNW) Asian families grow in both size and complexity, issues around not just succession planning but also asset protection become increasingly relevant to ensure stable business and wealth continuity.

As a result of this a number of Asia’s wealthiest families are now creating family offices. Many of these offices are being set up to manage assets, develop the next generation of leaders within a family company or to assist with philanthropic initiatives. There is no doubt that a well-operated family office can help navigate a family through all of these issues.

But are newly created (or existing) family offices in Asia considering fully the potential financial impact a personal dispute or divorce may have on a family’s wealth?


What is the financial impact?

In the event of divorce, potentially, a very significant one.

In LKW v DD1 the Hong Kong Court of Final Appeal endorsed the English House of Lords (as it then was) decision in White v White.2 In doing so, the court brought an end to discrimination between the breadwinner and homemaker on divorce and ushered in an era of ‘fairness’. With that came the ‘yardstick of equality’ and a presumed starting point that wealth should be divided equally. A claiming spouse’s reasonable needs are no longer the order of the day and now wealth is being shared on divorce. All wealth (including corporate and trust assets) is potentially vulnerable. This has, unsurprisingly, led to a string of a very substantial financial awards being made and, rightly or wrongly, Hong Kong earning its title as the ‘Divorce Capital of Asia’.

The financial risks are very clear. One way of looking at divorce in Hong Kong is, potentially, as a 50% ‘tax’ on all wealth. Professional advisers (including family offices) should be considering from the outset how best to mitigate that risk.It is now well known that a carefully and properly crafted international pre- or post-nuptial agreement (PNA) can be used as an effective asset protection tool and, in the right circumstances, will be enforced by the courts in Hong Kong in the event of a divorce. However, what is perhaps not so well known are the many pitfalls, pressures and complex issues that need to be considered if a PNA is to prove effective. Before addressing the key issues and in order to provide some context, it may first be helpful to look briefly at how the law has developed in this area.


The court’s approach

Despite widespread belief to the contrary, PNAs are not automatically legally binding in Hong Kong. However, two significant decisions (in London and Hong Kong)3 have taken a significant step in that direction.

The Hong Kong Court of Final Appeal’s decision in SPH v SA4 fundamentally changed the landscape in respect of PNAs when it endorsed the principles and law established in the earlier UK Supreme Court decision of Radmacher v Granatino.5 The decision in Radmacher concerned the principles to be applied when a court, in considering asset division following the breakdown of a marriage, has to decide what weight should be given to a PNA.

In that case the husband and wife married in London in 1998. The husband was French and the wife German. The wife came from a very wealthy family. They executed a PNA before a notary in Germany three months before the marriage at the instigation of the wife. On the basis the PNA was signed, the wife was due to receive a further portion of her family’s very considerable wealth. The PNA was subject to German law and provided that neither party was to acquire any benefit from the assets of the other during the marriage or on its termination. At the time, the husband was working as a banker. He declined the opportunity to obtain his own independent legal advice on the PNA. The parties separated in October 2006 after eight years of marriage. The marriage had produced two daughters who were born in 1999 and 2002. By that point, the husband had left banking and moved into an academic role.

The husband applied to the court for financial relief. The High Court judge considered the existence of the PNA, but reduced the weight to be attached to it because of the circumstances in which it was signed. He was initially awarded a total of £5.56 million. This included £2.5 million for a London home, £700,000 to discharge his liabilities, £25,000 for a car, €630,000 for a property in Germany and a capitalised maintenance fund of £2.335 million. The maintenance fund was to provide him with an annual income of £100,000 for life.

The Court of Appeal and subsequently the Supreme Court significantly reduced the husband’s award. Ultimately, the Supreme Court ordered that the husband’s £2.5 million home (which the wife should provide for him as father to their children) should revert to her once their youngest daughter turns 22 and that his maintenance fund should be significantly reduced to provide him with an income until his responsibilities as a home-maker come to an end, instead of for life.

The Supreme Court established the core principle that a court should give effect to a PNA that is freely entered into by each party with a full appreciation of its implications unless, in the circumstances prevailing, it would not be fair to hold the parties to their agreement. Fairness is very much an elastic concept and, while the Supreme Court highlighted certain circumstances in which a PNA may be found to be unfair, it will always be fact and case specific. PNAs are not automatically binding in a contractual sense and parties cannot, with the use of one, oust the jurisdiction of the court. It remains the position that the court, not the PNA, will ultimately determine how a couple’s assets and income should be divided on divorce.


Key considerations

Client management

Preparing PNAs for UHNWs is a potential minefield. Advisers need to manage expectations. This often involves asking the difficult questions and giving firm (but diplomatic) advice. What if, for example, a client’s fiancé refuses to sign a PNA and the relationship ends as a result of that? Or if a client provides instructions at the last minute and they are advised to postpone the wedding in order to avoid an argument of duress or pressure later down the line?

Planning ahead is key. Ideally, a PNA should be signed at least 28 days before a marriage to avoid possible arguments about pressure and duress later on. Careful thought will therefore need to be given as to how and when the issue of a PNA will be raised. Advisers may find themselves in difficulties if clients have not been fully appraised of the possible risks in advance. These are all potentially difficult issues which require sensitive handling.

Communications

Anyone considering a PNA must understand that, in the event of a divorce, the court in Hong Kong will likely see the lawyers’ files relating to the PNA (not just the agreement itself) and, also, communications directly between the parties. The paper trail is key if later on there are arguments about fraud, misrepresentation or pressure. At the outset, advisers will need to know about any conversations going on in the background. It is prudent to review all communications directly between parties which make any reference to the PNA. This could and should include emails, social media, text and WhatsApp messages. Advisers will need to look out for red flags and, in particular, any suggestion that one party is not genuinely prepared to sign the PNA.

On occasion, what may initially appear as a fairly benign message such as – “I’m only doing all this because your family are insisting on it” – could, later down the line, prove to be explosive. All too often, these kinds of messages (sometimes once a party has received some legal advice) are deliberately sent so they can be relied upon in an attempt to undermine the PNA in the event the relationship breaks down. These messages may prove to be evidence of duress or pressure which could render the PNA useless. There are a number of English cases6 on this issue and, time and again, a divorce petition is filed and the financially weaker party will assert duress or pressure in a bid to undermine the PNA. It is essential these angles are covered.

Financial disclosure and legal advice

As referred to above, if a PNA is to be upheld, the parties will need to have entered into it with a full understanding of its implications. To that end, while not essential, it is preferable that both parties to a PNA obtain independent legal advice and, also, that there is an exchange of financial disclosure. Often, UHNW or high-profile clients and their families may be reluctant to provide precise details and values of, for example, substantial assets held within family trusts or companies.

If the beneficiary of a large discretionary trust is planning to sign a PNA, it may be possible to agree that his or her interest in that trust is disclosed in fairly broad terms and without specific reference to the value of the underlying assets. If so, it is crucial the PNA carefully records that the other party is satisfied with the disclosure which has been produced and will not in any way rely on the fact that there had not been very specific disclosure in an attempt to undermine the PNA later on.

It is equally important to ensure that, assuming one party has a lawyer, the other is at the very least also given the opportunity to obtain independent legal advice. Nevertheless, the other party may feel he or she is happy to proceed (as Mr Granatino did) without advice. In those circumstances, it is essential the party who has declined the opportunity to take advice accepts that he or she will not rely on that in an attempt to challenge the PNA later down the line. Again, that must be carefully recorded in the recitals of the agreement.

Proper provision

A PNA which leaves a financially weaker spouse with very little (or nothing) is likely to be worthless. Suitable provision – which at the very least covers the weaker party’s reasonable needs – should be included in any PNA. Without that, a PNA will almost certainly be considered unfair and, accordingly, afforded very little or no weight by a court.

The risks of entering into a PNA which does not make appropriate financial provision for the financially weaker spouse were highlighted in the English case of Luckwell v Limata.7 The case involved an eight-year marriage and three children. The main asset in the case was a central London property which had, broadly speaking, equity of some £6.74 million. The property was held in the wife’s sole name and was the family home. The husband had no assets of his own and debts of £266,000. Neither party worked, however the wife was receiving substantial annual allowances from her parents. Before they married, the parties had signed a PNA which provided they would each retain their separate property and neither would make financial claims against the other’s property. The PNA specifically referred to the wife’s “wealthy family” and the gifts she had received from them. During the marriage, the parties signed two further supplemental agreements when the wife’s family were intending to pass her substantial gifts, including the family home referred to above. Without the PNA there would have been no marriage and without the supplemental agreements there would have been no gifts.

The problem with the agreements in this case was that from the start they provided nothing at all for the husband, no matter how long the marriage or what his needs might be in the event of a divorce. When the marriage broke down, the judge found the husband was in a “predicament of real need” while the wife enjoyed “sufficiency or more”. The judge found that some capital provision must be made for the husband to ensure he would have a suitable home to live in and for the children to visit. In the end, the judge ordered a stepped approach. The family home would have to be sold. From the proceeds, the wife was to provide the husband with £900,000 to purchase a three-bedroom property. When the youngest child turns 22, that property must then be sold and 45% of the net proceeds will be returned to the wife or her nominee. The remainder will then be used to purchase a smaller property for the husband. Had the wife made proper provision for the husband in the PNA and/or supplemental agreements (perhaps with some anticipated assistance from her family), they could have avoided a sale of the ‘trophy’ property and, most likely, the protracted litigation and their substantial legal costs.

It always pays to include sensible and responsible financial provision in a PNA. In the case of an UHNW client or family, reasonably generous capital provision of, say, £5 million is nothing compared to what could be at stake if the PNA makes no provision, is found to be worthless and, as a result, the court divides all of the wealth equally. The case of SPH v SA (referred to above) does not provide guidance on what will constitute ‘fair’ or reasonable financial provision in this context. The long-running and ongoing case of JEK v LCYP8 which involves a New Jersey PNA may provide some further guidance. What is becoming increasingly clear from both Radmacher and the subsequent line of English authorities is that fair and reasonable financial provision may not necessarily mean outright capital for the financially weaker spouse. As a result, UHNW clients and families will, at the outset, need to think carefully about how any capital provision should be structured and whether, for example, all or part of a payment should be held on trust which then reverts back upon a triggering event or at a later date.

Think internationally

International marriages are increasingly common and it is essential that advisers consider jurisdictional issues. Establishing where parties will be living and where they have their connections and interests will be key. For the young, wealthy, jet-setting client who perhaps does not need to work and wants to enjoy the freedom of being able to move around, this may not be an easy exercise.

Where a divorce takes place can make a huge difference in financial terms. Hong Kong (like England) is, compared with most other jurisdictions, still regarded as being very generous to a claiming spouse. The issue of jurisdiction and how that will be dealt with in a PNA is therefore always important. In the case of an UHNW client who is based in Hong Kong (or outside Hong Kong but with a substantial connection to Hong Kong) but perhaps also has connections and spends time living elsewhere, it may be possible to agree an exclusive jurisdiction clause in the PNA. In those circumstances, if possible, the PNA should specify a jurisdiction in which the family courts are less generous than Hong Kong. UHNW clients and families need to be aware of the issues around potential ‘forum shopping’. In particular, it will be very important they obtain advice as soon as a marriage hits the rocks as, with an international couple, it may be necessary to move fast and quickly file a divorce petition in a more financially beneficial jurisdiction.

Unlike some other jurisdictions, divorce proceedings can be issued in Hong Kong based on either party’s ‘substantial connection’ to the jurisdiction. In other words, a party does not necessarily need to be based or living in Hong Kong before he or she can start proceedings there. As a result, there is also the risk of long distance ‘forum shopping’. For example, a wealthy party and his or her family may be spending most of their time in Singapore but, perhaps, the husband has some connection to Hong Kong. It may be he has business interests or another home there. In those circumstances, his wife could file a divorce petition in Hong Kong while still living in Singapore. Very few clients and families are aware of this and, often, it comes as a shock when proceedings are issued out of the blue in order to try and gain a financial or strategic advantage.

Particular caution needs to be paid when internationally mobile families are involved. A sudden or unexpected request by a spouse to move ‘temporarily’ back to Hong Kong with the children from, say, the United States could be the start of a carefully planned forum shopping strategy. Different reasons or excuses may be given – “we just need some time apart to cool off” or “I need to head back and spend a few months with my family there”. It sounds fine at the time but if the marriage then breaks down the financial impact could be serious. Only four months of ‘integration’ of the children at school in Hong Kong could be enough to change their habitual residence to Hong Kong and, in the process, solidify the prospects of a divorce proceeding there.

It is also important to remember that in certain jurisdictions (particularly those governed by civil law), couples can often elect a property law regime which will then govern their matrimonial and non-matrimonial property. In jurisdictions such as France and Germany, a couple can elect to treat their own inherited property as separate property in much the same way as a Hong Kong PNA would seek to define and protect those assets. If they then move to Hong Kong, their elected property regime can be harmonised within a Hong Kong PNA so their intentions are clear.

Confidentiality

UHNW and high-profile clients will be keen to ensure their PNA does not become another tabloid or social media story. This is likely to be the case, particularly when a PNA includes, for example, specific details regarding financial matters or detailed recitals outlining very personal reasons as to why the agreement is being entered into. While it is often overlooked, careful thought should be given to including a detailed confidentiality clause to ensure the terms of a PNA, any subsequent divorce and all financial details remain private. Increasingly, clients are also including social media clauses designed to prevent deliberate acts of humiliation. For example, the parties to a PNA may agree that, in the event the marriage breaks down, neither of them will post, tweet or otherwise share via social media, positive, negative, insulting or embarrassing content or images of the other. There is currently some debate as to the enforceability of these types of terms, but they should always be considered.


Conclusion

A carefully considered and meticulously drafted PNA will provide some certainty, reduce risk and, ultimately, is likely to ensure costly, acrimonious and stressful litigation is avoided in the event a marriage breaks down. If not done properly, a PNA is likely to be useless. When substantial wealth is involved, PNAs should always be considered a vital part of a family’s governance. The stakes are high. The risks are clear. Sensible and responsible asset protection is essential.

 

This article was first published in the summer 2018 edition of the International Family Offices Journal.

 

  1. [2010] 13 HKCFAR 537.
  2. [2000] UKHL 54.
  3. Hong Kong family law broadly follows that in England.
  4. [2014] 17 HKCFAR 364.
  5. [2010] UKSC 42.
  6. Most recently KA v MA [2018] EWHC 499 (Fam) in which the wife unsuccessfully argued that she had been under undue pressure to sign a PNA.
  7. [2014] EWHC 502 (Fam).
  8. [2015] 4 HKLRD 798 (the author is part of the team advising the husband).

Authors

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