• the latent value or springboard present in the value of a business at the start of cohabitation
• the attempts at separating the active growth from the passive growth in respect of the increase during the relationship;
• the issue of a special contribution made by the party operating the business.

A major disadvantage of the Written Decision was that the valuation evidence was very largely redacted so as to retain the veil of anonymity.

This was a marriage which lasted from 2008 to 2015. In that relatively short period the business operated by the husband experienced a dramatic change of trajectory: instead of flatlining in relative terms, in 2012 it experienced truly stratospheric growth.

The Concept of Latent Value

It appears that the business was valued as at the date of marriage by the valuation expert and it seems most likely that this valuation had regard both to the historic performance and also projections for the following years. From these figures it appears that the expectations for the growth of the business were very pedestrian.

Divorce Courts allow themselves the benefit of hindsight in considering business valuation due to the guiding star of fairness. For the husband it was argued that the conventional valuation at the date of marriage was not the appropriate base:

“By the time of the marriage, the husband had put in place all the building blocks for the company’s later commercial success. This pre-marriage endeavour in the creation and development of a young business may not be fully recognised if one merely takes an arithmetical approach to the estimation of the value of the business….. the company had a latent potential which warrants ascribing a significantly higher value to his shares at the date of the marriage than emerges from the formal valuation.”

A Special Contribution

Another concept in the divorce courts, but very rarely applied, is that of a special contribution: if the party operating the business can demonstrate that his role in the creation of the wealth was truly exceptional, part of the wealth is set to one outside when considering the sharing concept.

One Judge, in cautioning against the regular use of the concept, has described it as being as rare as a white leopard.

During the marriage, and in particular in a period of three or four years between 2011 and 2015, the company of which the husband was chief executive officer (“the company”) became hugely successful, substantially because of the enormous popularity of one product used by millions of people across the world. The value of the business increased dramatically and in 2016 it was sold. The husband’s own shareholding realised about $540m.

The View of the Judge

The Judge was content to go against the views of the valuation expert in respect of the value at the start of the marriage:

To a not inconsiderable extent, the later success was built on those earlier foundations. [The Valuer] thought that this was not a significant factor in determining the value of the company at the date of the marriage because the subsequent growth in the business did not occur for several years after the marriage. In my judgment, however, the latent potential was there at all material times – it just remained latent for rather longer until the opportunities for growth arose.

The Judge also considered that the spectacular growth in the value of the company reflected in part the special contribution of the husband.

The Decision

The Judge awarded the wife 25% of the active growth in the value of the company during the marriage. The opening value was in accordance with the valuation of the expert, and the passive growth was the MSCI World Technology share index.

Comment

Under the sharing principle the wife would have been expected to receive 50% of the active growth during the marriage. The reduction to 25% therefore appears to relate to two factors, neither of which were separately quantified:

• the latent value in the company at the date of the marriage, to the extent not included in the expert valuation;
• the special contribution made by the husband.

This is another divorce case in which passive growth has been determined based on the use of an industry listed share index.