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• Author: Ray Brownson

Valuing private companies on divorce

In this case the Court of Appeal considered how to treat business assets on divorce. The sharing principle was applied which is, in essence, the equal division of matrimonial assets. The case was reported in the tabloids partly because of the sums involved and with the wife depicted as an “ex-factory girl” who had managed to ensnare the managing director. Whether she was a “gold digger” or not the couple had a long 29 year marriage and two children. The divorce seems to have generated a great deal of unhappiness as I noticed that one of their sons, or someone claiming to be a son, made extensive comments on a Daily Mail article regarding the financial proceedings.

So, what about the money? At trial Judge Mostyn found that the matrimonial assets available for division were worth a net £182 million. Some £161million of this wealth was in the husband’s private company; he owned 99% and the wife 1%. The wife was awarded 42% of the assets or £72.8 million. She was disappointed and appealed. The husband also appealed the way the award was structured. It is notoriously difficult to value private companies and so it proved in this case. An expert put the value of the company between £130 and £166 million and, in an updating report a year later, at between £185 and £227.5 million. These very wide ranges led the Court of Appeal to say that “very careful consideration would need to be given to the weight which could properly be placed on this evidence”. The Court went on (quoting another case) “..valuations of shares in private companies are among the most fragile valuations that can be obtained”. The valuations should be to assist the court in assessing the fairness of possible outcomes rather than giving the court precise mathematically accurate figures.

The trial Judge had treated the company shares as if they were a realisable cash assets saying, “the difference between it (the value of the shares) and cash is….the sound of the auctioneer’s hammer” The Court of Appeal disagreed. Shares in a private company will rarely be quickly realisable and do not have the same risk free liquidity of cash.

The Judge decided that 20% of the company was pre-marital and so excluded that part from consideration in the divorce. He did so by “straight line apportionment” working backwards from his finding of the value of the company. The wife objected pointing out that the company’s value had accelerated greatly during the marriage. The Court of Appeal agreed with the Judge’s assessment and said that the Judge’s finding was “a holistic, necessarily retrospective, appraisal of all the facts and then the application of a subjective conception of fairness”. A strict accounting approach was rejected. The Court does not have to follow one particular method of determining what are, and are not, matrimonial assets.

The husband was successful in arguments regarding the structuring of the payments to the wife. So the wife lost her appeal and was ordered to pay two thirds of the husband’s costs. Ordinarily, each side pays their own legal costs but that principle does not apply on appeal.

Martin v Martin (2018) EWCA Civ 2866

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