Company valuation as part of a divorce settlement
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Published: 22 Nov 2021
When breaking up is hard to do - Part 2
In When breaking up is hard to do - Part 1, I wrote about how directors/shareholders should prepare to go their separate ways.
In Part 2 of When breaking up is hard to do, I would like to focus on the situation of divorcing couples, where either or both parties have an interest in a company, which needs to be valued as part of the divorce settlement.
The Court has two essential tasks when determining any financial remedy application, namely:
- Computation of the amount and
- Method of distribution
Distribution will, particularly in cases where the available resources exceed the parties’ needs, require the court to consider whether property is “matrimonial” or “non-matrimonial”.
Matrimonial property is the property which the parties have built up by their joint (but inevitably different) efforts during the span of their partnership.
Non-matrimonial property is property received or created outside the span of the partnership, or gratuitously received within the partnership from an external source.
The (equal) sharing principle applies to matrimonial property and not, or only in a limited way, to non-matrimonial property.
Complications arise where non-matrimonial property has been “mingled” with matrimonial property.
In such circumstances the court will need to consider the extent to which it has been “mingled” and the length of time over which that “mingling” has taken place. In some cases, there is a clear dividing line. In others it is not so definite. In the case of the latter, the court will make a broad assessment based on the evidence, when deciding there is good reason to depart from an equal division between the parties.
Historic valuations of private company interests can be relevant to arguments concerning non-matrimonial property where:
- The business was established before the marriage and
- Where a business has flourished post-separation as a result of one spouse’s endeavour
In the former case, a spouse may seek to use a historic valuation to persuade the court when the marriage began.
In the latter case, the valuation date shifts to the date of separation or the date of trial to argue that it was post- separation that is or is not responsible for the current value.
This can be demonstrated in the case of E v L in the Family Court in 2021.
The marriage was of no more than 4 years, which produced no children. The single joint expert valued the company in 2016 at $5,067,000, based on adjusted income for the three years 2013-2015, putting himself in the shoes of a fictitious purchaser at January 2016.
The presiding judge Mostyn considered this approach was unfair. With the benefit of hindsight at the time of the trial, the adjusted income for 2016 to 2018 should be considered, which gave rise to an enterprise value of $10,860,000, with a 45% discount for various matters pertinent to the company and existing market conditions, to give a valuation of $5,973,000. An increase of $906,000 or £647,000.
In a different case, WM v HM (2017) the same judge applied a different approach by apportioning the rise in valuation on a straight-line basis.
So the basis of valuation of non-matrimonial assets, such as private companies, needs to be carefully considered and any approach chosen will need to be compared with these two cases and a proper argument formulated as to the basis adopted.
For further information on the above do contact David Cane at [email protected] or phone 07749 080 806
