The purpose of this article, is to consider the application of the section 25 criteria and in particular the issue of company valuation in the case of E v L  EWFC 60, as decided by Mostyn J.
Jane Carter of these chambers has discussed this case and its primary ratio and reasons in her recent article “E v L  EWFC 60 (Fam) – Short childless marriages, the sharing principle and the absence of white leopards”.
In summary the Court:
- Confirmed that in reaching its decision, it had exercised a general discretion and took into account all the matters mentioned in ss 25(2) and 25A of the Matrimonial Causes Act 1973 (“the Section 25 criteria”), sought to take account of all the relevant case-law and the disposition to the Wife was the result of a broad analysis of fairness [para 105];
- Distinguished very clearly between the two different concepts of needs and sharing [para 22];
- In short marriages where the sharing principle applied, the issue of childlessness should be banished from consideration as to whether there should be a departure of the application of the equal sharing principle [para 34] given the risk of inevitable triggering of subconscious discriminatory practices [para 28];
- By way of illustration used the “white leopard” analogy: the white leopard used to denote the rarity of sharing of non-matrimonial property [para 45] which did not apply in this case given that the Wife’s needs could be met out of equal division of the shared assets [para 102], the Court holding specifically that this was not a white leopard case [para 77];
- When assessing the value of the business and the private company in particular to be included in the marital acquest, the Court held that it would not be hidebound by pure valuation theory but made a broad analysis of fairness, the end date for the purposes of calculation of the acquest determined as the date of trial [para 73]; and
- The issues of chattels and costs were not determined by the Court [para’s 106 and 107].
The facts of the case were briefly, that at the time of trial, the Husband was 66 years old and the Wife 61. The relationship began in December 2015 whereupon the Husband started providing the Wife with monthly financial support (between £5,000 and £10,000). The parties were married in June 2017. It was a childless marriage and the Court found for the purposes of any matrimonial acquest that the start date was January 2016, the end date being the date of trial, namely July 2021, in other words, a 5 year period.
The Husband was a highly successful production manager for live music events and had an interest in 6 companies, the relevant company and in respect of which valuation issues arose in particular, being (private) Company A in which he had a 100% interest. The Wife was a housewife, having previously done some modelling, being the proprietor of a lingerie and swimwear shop for some time, having worked for her father at a hotel and then in the antiques industry and since 2012 her income (aside from the Husband’s allowance) coming from the letting of an investment property.
The Court found at the date of trial that the total matrimonial property (taking into the account the matrimonial assets held by the Wife of £444,980 and that of the Husband of £422,521 which totalled £867,501 plus the overall increase in the equity value of Company A found to be £3,051.996) to amount to £3,919,497, 50% of which was £1,959,749.
The overall assets net of tax were found to be £9.2 million, which after the equal division of the assets found to have been accrued during the marriage meant that the Wife ended up with about £2 million (21% of the overall assets) and the Husband £7.2 (79%).
At the date of trial, the Wife’s open position was that she should be paid a lump sum of £5.5 million. The Husband’s open position was that the Wife should be paid £600,000. The Court noted that at the time of trial the parties’ combined costs amounted to £900,000. The Court noted that the extent of the difference between the parties was extraordinary, appearing to be the product of imprecision within the case-law combined with intransigence and dogmatism in the pursuit and defence of the claim [para 15].
The main reason for the gulf between the parties was that the Husband maintained from the start that because of the short duration of the childless marriage, this was not a case for equal sharing of the marital acquest but one where the Wife should be confined to very conservatively assessed needs.
As indicated above, the Court held that the equal sharing principle applied regardless of the length of the marriage and regardless of whether there were children born of the marriage.
Interestingly, in coming to this conclusion, the Court considered the case law and reconsidered and recanted its (heretical) opinion in the case of GW v RW  2 FLR 108 where Mostyn J had opined that “in order to have equal validity with a financial contribution, a domestic contribution needed to be earned over time” [para 27]. At set out a para 43, Mostyn J, indicated “As explained above, I now figuratively hold my hand in the flames and recant. There is absolutely no logical reason to draw a distinction between an accrual over a short period and an accrual over a long period. As Lord Nicholls (in the case of Miller  UKHL 24  and ) pointed out the statutory factor of the duration of the marriage will be reflected in the nature of things by the fact that in a short marriage the accrual will almost inevitably be less than in a longer marriage”.
The other main issue between the parties was valuation of the Husband’s private Company A. A Single Joint Expert (“SJE”) had been appointed. However, the Husband took exception to the evidence of the SJE and he was allowed to adduce the expert evidence of a second accountancy expert. In order to allow quality of arms, the Wife was also allowed to adduce the evidence of a third accountancy expert. Permission was granted by the Court for the experts to give evidence by way of a video hot-tub session.
At para’s 51-73, the Court considered the issue of the valuation of Company A and in particular, some basic principles. In summary the Court observed that:
- A valuation of a business which is not based on the market value of the net assets has been described as “fragile” because there are so many subjective factors in use by the person giving the valuation opinion [para 51], resulting in different expert valuations the cost of which can quickly become disproportionate. The Court referred in particular, in addition to other cases, to the case of Versteegh v Versteegh  EWCA Civ 1050  in which Lewison LJ encapsulated judicial concern by stating “The valuation of private companies is a matter of no little difficulty. In H v H  EWHC 935 (Fam),  2 FLR 2092, Moylan J said at  ‘the valuations of shares in private companies are among the most fragile valuations which can be obtained”. The reasons for this are many. In the first place there is likely to be no obvious market for a private company. Second, even where valuers use the same method of valuation they are likely to produce widely differing results. Third, the profitability of ..(such) companies may be volatile….Fourth, the difference in quality between a value attributed to a private company on the basis of opinion evidence and a sum in hard cash is obvious. Fifth, the acid test of any valuation is exposure to the real market which is simply not possible in the case of a private company where no one suggests that it should be sold”;
- In this case, for the various valuation dates the accountants had generally adopted the same valuation technique namely the multiplicand times multiplier where the multiplancand is the reasonably foreseeable future maintainable earnings and the multiplier being the estimate of how many years of notional earnings a notional purchaser would pay for, the product being the enterprise value [para 54]. In other words, valuation = foreseeable future maintainable earnings x estimate of how many years of notional earnings notional purchaser would pay for = enterprise value. As the Court opined, the valuation is therefore no more than an educated and informed guess about a hypothetical future (albeit proximate event), the future proximate event being the fictitious purchase of the company being valued by a bona fide purchaser at arm’s length who is fully informed of all the relevant facts and matters [para 54];
- In contrast to the iron principle of pure valuation theory, where the valuer is not allowed to use actual knowledge of subsequent events to influence, let alone determine, the historic valuation being undertaken, in financial remedy cases, actual knowledge of subsequent events is generally used in order to fix a historic value of the asset in question which is regarded by valuation purists as little short of heresy [para 55 & 56];
- The Court held that it did not see why the Family Division should enter the “dim world” identified by Danckwerts J in the case of Holt v Inland Revenue Commissioners  1 WLR 1488 as being the “dim world peopled by the indeterminate spirits of fictitious or unborn sales”. The Court held further that valuations, when required should be based on real and known events. The Court went on to remark that “ It is difficult to see how the latter approach of ignoring known facts could be consistent with the court’s obligation to achieve a fair outcome based on the factors set out in section 25 of the Matrimonial Causes Act 1973 and.. (quoting) Wilson LJ in White v Withers  1FLR 859, if the court is to discharge its duty (Mostyn J’s emphasis) under the Act, it must be “furnished with true information about the parties’ resources” [para 30];
- The Court held that it regarded it as unreal and a likely source of real injustice for the calculations to be undertaken to work out the scale of acquest (and hence the Wife’s award) on historic figures which with hindsight are shown to be completely wrong and not consistent with the ‘broad analysis of fairness’ [para 66];
- Dealing with the issue of capitalisation of earnings of the business, the Court referred to the cases of (a) Jones v Jones  EWCA Civ 41 and Wilson LJ’s remarks at [25(b)] and (b) Waggott v Waggott  EWCA Civ 727 that of Moylan LJ at -  and held that when considering a valuation basis on capitalisation of future maintainable earnings, the court must ask itself whether and if so, to what extent, the assessment of future earnings depends on the participation of the respondent and if the future participation of the respondent is indispensable, the court must ask itself whether the valuation is at least in part, of the respondent as a person [para’s 67 – 68];
- In assessing the value of the business to be included in the marital acquest as indicated, the Court held that it was not going to be hidebound by pure valuation theory but making a ‘broad analysis of fairness’ [para 70] with the start date (January 2016) and end date of the acquest being the date of trial [para 75 and 73];
- In working out the value of the business, the Court firstly worked out the value of the increase in surplus assets during the acquest period finding, allowing for hypothetical tax of 20% that this amounted to £2,533,996 [para 87];
- Secondly then turning to the enterprise value during the acquest period [para 88 – 92], the Court found that $10,860,000 million to be a reasonable starting figure which had to be discounted for 4 reasons namely: (a) it being unclear as to how the pandemic is going to play out and whether a resumption of normal life including staging of concerts and festivals will actually happen soon [para 93], (b) whether for any future tours the Husband’s business partner will insist on sharing the proceeds , (c) if any enterprise value were actually saleable, the need of a great deal of post-sale toil by the Husband and his business partner [para 95] and (d) it being clear that a part of the future maintainable earnings represented the fruit of the Husband’s personal earning capacity which would be unlikely to be acquired or reproduced by the purchaser [para 96]. Accordingly, the Court held the overall discount to reflect all four facts was properly set at 45% and allowing for 20% tax, this amounted to £581,000 it being acknowledged by the Court that this was a subjective figure but arrived at following a broad discretionary analysis of fairness [para 97].
Accordingly, the Court held that the overall increase in equity value of the business during the acquest period was therefore £2,533,966 + £518,000 = £3,051,966 [para 98]. Allowing for the total assets accrued during the marriage to be in the sum of £3,919,497, the Wife’s 50% award, allowing for the assets of £444,980 meant a balancing lump sum rounded off payment of £1,515,000 [para 99].
In awarding the Wife this sum the Court considered that on payment of the lump sum the Wife would be left with £1.59 million [para 102] in addition to her flat in West London in which the Wife and her dog had happily lived for years before the relationship [para 102]. The Court did not accept given the brief duration of the marriage, needs had been generated which entitled the Wife to a significant upgrade in her accommodation [para 102]. The Court considered that the Wife would need at least £50K to get the flat back into good shape and this would leave her with £1.54 million as a Duxbury fund [para 102]. This would give the Wife an annual net spendable index-linked income of over just £90,000 (ignoring any state pension entitlements), the Court deeming that this would be a very ample sum with which to meet her revenue needs and enable her to live comfortably, as well as keeping and riding her horse, the purchase of which the Court judged to be completely reasonable [para 103].
As indicated above, the Court did not deal with the issues of chattels and costs [para’s 106 – 109]. In respect of the issue of costs, the Court indicated that if costs were not agreed and the Court were asked to determine the matter, it would be looking very closely as to whether the parties had complied with their obligations to negotiate openly and reasonably pursuant to FPR 28A para 4.4 and also considering the parties’ conduct [para 107].
In conclusion, although every case turns on its own facts, this case is an important reminder of the necessity of forensically examining the facts and concepts in accordance with the Section 25 criteria and the case law.