Introduction
In an earlier article I looked at the Court of Appeal divorce case of Jones and Jones. The hapless judges handling the Appeal had to give some shape to a decision of a lower court. That decision had entangled concepts of hidden value in a business, in the form of a springboard, with a concept which is easy to describe but difficult to measure, namely passive growth. The written decision of that lower court had been exceedingly lengthy, to the great frustration of the Appeal Court.
The case of Robertson and Robertson related to shares in an AIM company held by the husband at the date of the start of cohabitation and subsequently. However, it was a truly exceptional AIM company, ASOS plc. This was considered to be the best performing company of the entire AIM market. To add further interest, the husband was the founder and also the CEO of ASOS during its period of stellar geometric growth.
The position of the wife was clearly stated:
'The wife concedes that the actual value of the shares as at the date when the parties began to cohabit, uprated by an assessment of so-called passive growth, should be carved out as a non-matrimonial asset and ascribed to the husband. But she says that the balance of their value (representing so-called active growth during the period of the cohabitation and marriage) should be divided equally between the parties on the sharing principle, being, she contends, matrimonial assets.'
The amounts involved were very significant and were stated to be just under £141m net of taxation.
Judicial understatement
The Bench is renowned for expressing itself in modest and cautious terms. Hyperbole is not their standard lingua franca. The judge in this case made a succinct comment on the earlier Court of Appeal case. It was an observation which was laden with much meaning:
'Jones v Jones itself is not the easiest of cases from which to extract a clear ratio or precedent. Arden LJ appears to have disagreed with Wilson LJ's approach to passive growth.'
What is passive growth?
We can all recognise that a significant shareholder in an AIM or listed company, who had no part in its management, would benefit from an increase in shareholder value at exactly the same rate as the inspirational shareholding founder of the company who continued to provide its main driving force.
The concept that the same shareholder growth should be described as either active or passive according to these two circumstances is a concept with which many of us will struggle.
The growth of ASOS was stellar, with the shares increasing in value from 10p to £67 over the course of the cohabitation and marriage.
Up steps the valuation expert
In these circumstances, attempting to derive a figure for passive growth and basing it on the shifting sands of conflicting dicta in a challenging case, may be considered to be a labour of Hercules.
A redoubtable business valuation expert took up the challenge. His work was described in warm terms by the judge:
'His resulting report is one of great thoroughness and accountancy expertise and erudition at which one can only marvel, and to which I pay tribute.'
A portrait of fairness
Despite the positive comments on the labours of the valuation expert, the judge stated that this was not an accounting exercise but involved the application of broad judicial discretion.
In line with that thinking, he decided to ignore the delicate and intricate pointed precision of the highly skilled draftsman; he chose instead the largest of brushes with which to cover the canvas. He decided that half of the value in the shares should represent the acquest and passive growth (and therefore non-matrimonial property, not to be shared) with the other half being matrimonial property which was to be subject to sharing.
This was fully in step with at least one of the statements made in the Court of Appeal decision in Jones and Jones:
'Application of the sharing principle is inherently arbitrary; such is, I suggest, a fact which we should accept and by which we should cease to be disconcerted.'
The cultural background of the divorce courts
The above comments are entirely consistent with some earlier divorce cases. Reading such cases it seems that we are at an unruly frontier, with the opinions of business valuers being readily discarded. This was evident in the case of Jones and Jones: despite two business valuers agreeing an opening value of £2m for the shares in the company, the Court of Appeal doubled this figure to £4m with a wave of the hand, in order to allow for the concept of the springboard or latent value. The judge concerned was happy to describe this adjustment as being wholly arbitrary.
In an earlier case of H&H [2008] EWHC 935, the judge stated the following:
'As Lord Nicholls said, detailed accounting is expensive, often of doubtful utility and, certainly in respect of business valuations, will often result in divergent opinions each of which may be based on sound reasoning.'
Comment
We can all agree with the fragility of business valuations: as business valuers we endeavour to value exceedingly complex, multi-dimensional assets with many potential earning and value trajectories.
Case law in the divorce courts has evolved into thoughts of the invisible latent value of the spring board, together with ideas of passive appreciation. Business valuers would consider that their valuations embrace the former in any event. The concept of passive growth remorselessly results in valuation work becoming more computationally intricate rather than less.
We are left with the deepest of ironies: the divorce courts are the part of UK jurisprudence which appears to treat business valuation with the greatest caution and to question its relevance; at the same time, it also places the greatest and most challenging of demands upon it.
Andrew Strickland
