While statistics reported in media indicate that only one out of 100 Indian marriages end up in divorce compared to 50 percent in the US, the incidence of divorce though low has been steadily creating curiosity about prenuptial agreements.
Pre-nups are agreements entered into by couples before they get married to decide on the ownership of their respective assets in case their marriage fails. These agreements are especially relevant to protect the wealth of business families in the event of a divorce. In the context of listed companies owned by business families, prenups can be used to protect shareholder wealth by ensuring that the ownership and control of the company remain with the family. This can help prevent the unintended consequence of shares of the promoter family getting into third parties’ hands, which could hurt the company’s performance and stock price.
The Hon’ble Gujarat High Court in the case of Bhanjibhai Anandbhai Chavda vs State of Gujarat and Ors. observed that Pre-nuptial contracts were akin to economic insurance against a likely future divorce.
The recent case of an Indian conglomerate’s stock with interest in multiple businesses tumbling by 20 percent in a matter of a short time when the wife of the chairman filed for divorce leading to a loss of close to USD 200 million in market capitalisation drives home our point.
However, in India, prenups are not enforceable in view of Sec 23 of the Indian Contract Act, 1872 which says that any contract which is against public policy or dilutes the rights of a person under personal laws cannot be enforceable in the court of law. For instance, the Allahabad HC in Income Tax vs Smt. Shanti Meattle held that since the agreement between the husband and wife brought an end to all rights that a husband could exercise in relation to his wife under the personal laws, it could be said that the agreement was opposed to public policy, and as such was hit by Section 23 of the Indian Contract Act.
With the Indian economy graduating up as a force to reckon with in the global economic order that is reflected in a rising per capita income, it is time for India to seriously debate on legally recognizing pre-nups as an effective tool for avoiding prolonged and bitter litigations after building in suitable safeguards to prevent misuse and protect the welfare rights of the spouse.In fact, going a step further, we strongly believe that all business families of listed entities can consider pre-nups defining the terms of a divorce settlement and establishing a framework for the management of the family business so that the ownership and control of the company remain with the family. This can go a long way in protecting minority shareholders and can have a positive impact on the company’s performance and stock price.
Legal perspectives and interpretations can evolve and the legal status of pre-nups may change. Meanwhile, till prenups are recognized under Indian laws, Indian business families can consider transferring family’s shareholding to a family trust to insulate the business from bitter marital disputes. This can include provisions for the appointment of professional trustees to manage the business, as well as guidelines for the distribution of profits and dividends.
