Valuing businesses during divorce: case law

    The case law on business valuation seems, instead of demonstrating a clear preference for a particular method, to demonstrate the court’s desire to focus on the most realistic option in a given situation rather than the hypothetical outcome.

    While some cases, for example Sorrell v Sorrell [2005], still considered valuation by looking at hypothetical outcomes, the courts are now increasingly quick to criticise when they judge that the reality of the situation has not been adequately considered.

    For example, in APD v RD [2013], the judge criticised a valuation where shares were valued by sale price, without taking into account the fact that the husband was intending to give these shares to his children rather than selling them.

    Similarly, in F v F [2013], the court reminded accountants to be realistic when making valuations. In this case, both parties’ valuations had failed to consider the existence or effect of a shareholder agreement. In D v D, it was deemed unrealistic to have valued a specialist company by considering its open market sale price, when it was clearly unique and unlikely to find a purchaser.

    Charman v Charman clarified that the preferred approach to valuation “is and always has been to look at the reality of the situation in any given case”. This was echoed in N v N [2010], where the judge stated that a purely hypothetical valuation was inadequate and would “lose some of its force and relevance”; instead, “in my view, the overall exercise should include… the likely reality”.

    Nonetheless, the need for valuations in certain cases has also been disputed, demonstrating that the courts’ view on valuations remain variable and by no means set in stone. In A v A [2004] the judge did not look at either of the valuations provided. Furthermore, in H v H [2010] the judge stated that the valuation of the business should not be viewed as a valuation per se but rather as an assessment of the individual’s future income, arguably questioning the importance of valuations as a whole: “the even larger issue between the parties… is whether the valuation actually matters at all”.

    Moreover, the courts’ views on applying discounts also appear to be changing. For example, a series of judgments seems to demonstrate a move away from the CEO selling discount, described in Charman v Charman as a discount that is “nowadays… old hat”. The judge ruled that CEOs were no longer a rarity, indeed were “now, sadly, frequenters of these courts and, with the most minimal of careful public relations prior to a sale, it is of no moment so far as the stock exchange is concerned”.

    Thus the discount should no longer apply since “evidence and experience shows that there is no such effect on the share price of the CEO’s company of a sale following divorce”. A similar judgment was reached in Sorrell v Sorrell.

    However, in Cooper-Hohn v Hohn [2014], the court seemed to counter this opinion by highlighting the importance of the individual in the business. The husband argued successfully that, if he were unable to manage the business, it would result in liquidation. It is notable that this case, as in H v H, also questioned whether a valuation was needed: the wife was refused permission to value the management entities through which the husband received financial reward.

    Nonetheless, the case did underline the need for realism; it was deemed that the evidence proposed by the wife was too speculative and irrelevant: “some assets cannot sensibly be ascribed a capital value… the valuations in this case would likely be theoretical”.

    As regards pre-acquired assets, the Court of Appeal case Jones v Jones [2011] allowed both the springboard and passive growth argument. The husband’s business, having been running for several years, was worth £2 million at the date of the marriage; it increased to £12 million by the couple’s separation, and was subsequently sold (during the proceedings) for a £25 million net profit. Considering the valuation which should be ascribed to the company at the date of the marriage, Lord Wilson believed adjustments should be made to the £2 million figure. With regards to springboard (‘the husband’s personal capacity at that date to build it up in the future’), it was deemed to be in play as an offer was made to buy the company for £6-7 million a year after the marriage took place: “in my view… at each of two different dates there were springboards in place in the husband’s company which the respective professional valuations failed to reflect”.

    Similarly, the extent of passive growth during the marriage was calculated by analysing the increase in the FTSE Share Oil and Gas Producers Index.

    This said, Arden LJ found the passive growth argument more difficult when considering an actively run company rather than, for example, property or art S v S [2006]: “As to ‘passive growth’, I agree that in principle, in the circumstances of this case, an allowance should be made even though the asset is a private company the business of which has developed and expanded (in this case exponentially) during the marriage”. He reiterated the importance of focusing on the reality of the situation: ‘the court should so far as it can look at what has actually happened and not at what might have happened’. The judgment was followed in N v F [2011] by Mostyn J but it was emphasised that the way to approach pre-acquired assets is very fact specific and remains highly discretional.

    Furthermore in F v F [2012] Macur J held that the value of the company in 1993, and the increase due to passive growth, had to be excluded from the marital property to be divided “for the purposes of assessing fairness of division”.

    Whilst it is evident from the case law that the court uses considerable powers of discretion, and a variety of methods in approaching the valuation of businesses as an element of the assets to be shared in divorce, there does seem to be a current desire to focus on the concrete reality of each situation, rather than looking at the hypothetical outcomes.