Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.

IX and IY [2018] EWHC 353

Bouncing on the Springboard

The normal approach to the sharing principle in respect of a business interest introduced into a marriage includes the following steps:

• Establish the conventional value of the business interest at the date of marriage or start of cohabitation;

• Determine whether that valuation under the current value method or CVM should be uplifted for its latent potential as divined by the Court; 

• Apply passive appreciation to the uplifted value; 

• Deduct the figure calculated above from the value at Trial and the difference is the amount of the value to be subject to the sharing principle. 

The Heavy Lifting of a Zebra

In this case the husband argued that his shares in a company called Zebra should be excluded from the sharing principle altogether. He argued that the “heavy lifting” in respect of the company had been done before cohabitation started. This then meant that virtually the full value was present in the acquest as the business then grew of its own momentum thereafter. (It may be of relevance that this was a hi-tech company.) Per the husband, the further accretion in value should be considered to be equivalent to the indexation of that initial value during the period of the cohabitation. 

The Approach of the Court

The Judge mused on the use of the Nasdaq technology index for the period of cohabitation: for the relevant period from 2009 to 2018 this resulted in an opening value being multiplied by 7.04. He considered that the company had a very considerable latent value at the start of the relationship. However the husband had also worked very hard in developing the business during the period of cohabitation. 

The Judge decided to ignore detailed calculations: “In all the circumstances I do not consider on the evidence that it is possible for me to undertake a reliable valuation of the latent potential of the business or to apply any sort of indexation to it for passive growth.”The Judge decided that 40% should be considered to be a non-marital asset and that 60% was a marital asset. This then meant that the husband had an entitlement to 70% of the value, with 30% being the share for the wife. The Judge made the point that he was very much taking the non-formulaic approach.

Comment

This can be compared to the case of Robertson and Robertson: in that case the Judge was faced with a similar conundrum, albeit with shares in an AIM company, ASOS plc. In that case the allocation was 50% to each of the marital and non-marital assets. 

WF and HF [2012] EWHC 438 (Fam)

The Judge is Not Amused

In this case Mrs Justice Macur did not hold back on her acerbic comments on the litigation: 

“This ancillary relief dispute has been the subject of 3 substantive directions hearings and conducted at final hearing by specialist matrimonial leading and junior counsel on each side, instructed by specialist matrimonial solicitors and costing the husband and wife £2.4 million between them.”

Her negative views spilt out onto much of the written decision: she described a witness who gave accounting evidence and who was accused of being partisan: “she was her own fool and nobody else's knave in doing so.” She described the decision to call a strategic consultant as an expert as “a pointless, costly and counter-productive exercise.”

Valuation Harmony and Discord

The relevant company was called Franklin; the two experts, from national and international firms, agreed on a closing valuation of £17.5 million for the entire equity. One of the experts was a single joint expert and the other was appointed by the wife. 

It is a matter for some regret that the Judge ignored a century of jurisprudence in her views on the valuation:

“I consider the valuation of the individual shareholdings in the context of the share agreement to be so artificial as to border on the meaningless. The share agreement prohibits the sale/transfer of shares to other than existing shareholders and Mr X, the managing director.”

It is also a matter for raised eyebrows that one of the experts made the point that in that circumstance the market value of the shares was nil. This point was considered by the Judge to be “irrefutable”.

Springboards and Passive Growth

Only the single joint expert had valued Franklin at the start of the marriage: he had used a three-year weighted average EBITDA multiple and had added on surplus cash. He had also, as had been the custom at the time, added on a control premium to reflect the husband’s 100% holding. This valuation was accepted. 

There was no mention, in the written decision, of any uplift to opening values in respect of the concept of latent value of the springboard.

The single joint expert had also considered the question of passive growth; his proposal of a 100% uplift for indexed growth was accepted by the Judge. 

Andrew Strickland, Consultant
Scrutton Bland

Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.