07 November 2017

How to reflect the value of pre-marital business in a divorce settlement

Michael Gouriet
Partner | UK

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Recent cases highlight the challenge faced by English family courts in attributing fair value to a business established by one spouse prior to marriage.

In the recent case of WM v HM [2017], when determining the overall division of assets on divorce, Mr Justice Mostyn was tasked with deciding the value to be attributed to the husband's business at two points; at the time of the proceedings and also 29 years before, when the relationship had begun.

The business (which manufactures and supplies building materials) was established in 1978 and the parties met in 1985 when the wife was a worker on the factory floor. The couple went on to have two children, and married in 1989.

On consideration of the evidence at the final hearing, Mostyn J concluded that the appropriate valuation of the business was £221m.

As to the historic value, applying pure mathematics, the single joint expert valued the company at the start of the relationship at between £188,000 and £414,000. Applying the percentage increase in the FTSE All Share Sector relevant to the business (540%) (a method used with approval in previous decisions such as the Court of Appeal case of Jones v Jones [2011]) the starting value would be £1.5m – £3m.

However, Mostyn J did not consider this approach produced a 'fair' outcome in the circumstances of this case. It would result in all but a very small percentage of the current value of the business being considered 'matrimonial property' and subject to equal sharing, and it ignored the true value and latent potential in the asset present before the parties met. An alternative valuation approach, a linear time apportionment, produced a figure indicating that 20% of the present value (ie £44m) had been accumulated at the time of the marriage. This figure more realistically reflected the true potential of this company at the start of the marriage.

Mostyn J observed: 'The formation of a value judgment about the past value of something is essentially subjective but it must have some evidential basis. But the evidence is certainly not confined to a strict black-letter accountancy exercise. It involves a holistic, necessarily retrospective appraisal of all the facts and then the application of a subjective conception of fairness, overlaid by legal analysis. This is not arbitrary in the sense that it is unreasoned or capricious.'

However, historic information in relation to aged businesses might not always be available. This was the scenario considered by the Court of Appeal in September this year in the case of Hart v Hart [2017] which concerned the husband's business going back 30 years. Importantly, both the husband and wife agreed that the husband was wealthy at the start of the marriage. At first instance the Judge tried to make a number of evaluative mathematical calculations but concluded that none produced a reliable result. Although the husband was criticised for being opaque with his financial disclosure, the Judge decided that the principled approach was to provide the wife with her needs which resulted in an award to her of £3.5m out of a total pot of £9.4m. The Court of Appeal subsequently rejected the wife's argument that a formulaic approach must always be adopted in relation to the valuation of non-matrimonial property. The concept of property being either matrimonial or non-matrimonial is a legal construct and it can be artificial to attempt to draw a 'sharp dividing line'. In some cases there may be a complicated continuum whereby non-marital property morphs into matrimonial property. Forensic investigation can be 'extremely expensive and of doubtful utility' and proportionality is critical because it underpins the overriding objective.

The Court of Appeal in Hart confirmed that if the Judge is unable to make a specific factual demarcation between matrimonial and non-matrimonial property but concludes that the parties wealth includes an element of non-matrimonial property, the court in its wide ambit of discretion can apply a broad assessment of the division of assets to achieve a fair overall outcome between the spouses even if the wealth held by one of the spouses at the start of the marriage could not be precisely determined.

The following referenced cases further highlight the scope of the Court's discretion as to pre-acquired business assets:

The case of Jones v Jones [2011] is a good example of the exercise of discretion in that the court's doubling of the initial valuation figure from £2m to £4m seems to be based on judicial instinctive feelings of fairness rather than being referable to any particular piece of evidence. Wilson LJ found that 36% of the value of the business funded 10 years before the marriage which itself lasted ten years was to be treated as non-matrimonial and not to be subject to sharing. In this case Mr Jones succeeded in persuading the Judge to adopt a creative, arguably artificial, inflation of the actual starting figure for the value of his business in order to shrink the amount of the matrimonial property available for division.

In Miller v Miller [2006] the House of Lords felt that the husband should benefit from having brought into the marriage some intangible unquantifiable knowhow which contributed to the significant enhancement of value of the business during the short marriage.

In Robertson v Robertson [2016], Holman J decided that half the value of ASOS was non-matrimonial, a favourable decision to that husband given that the business was founded only two years before the marriage, which then lasted for 14 years. Again, the Judge decided that the numerically quantified figure for the value of the shares at the start did not fairly reflect what the husband had really brought into the marriage.

As the Court of Appeal said, 'the exercise is more an art than a science' and to quote Lord Nicholls from Miller [2006] 'fairness has a broad horizon'.

These cases once again demonstrate the breadth of discretion of the English Family Court in its quest for a fair outcome on divorce with each case turning on its own specific facts.

This article forms part of our Autumn 2017 family newsletter, alongside the other articles found in the Insight section below.

Michael Gouriet Partner | London

Family law blog