Further Caution By The Court’s in Relation to Company Valuations: WW V XX [2024] EWFC 330

Divorce & Matrimonial Finance

17 January 2025

This is another case where the court has expressed the caution the courts have to take in relation to company valuations.   The matter was heard by HHJ Hess and even though a CJ his views are always well worth listening to in relation to Financial Remedy cases.

The background to the case was that the husband (H) was aged 52 and the wife (W) was aged 38).  They cohabited from 2010, married in 2017 and separated in 2022.

H was a citizen of ‘Country A’ by origin although had obtained UK citizenship.   He owned and ran a business ‘Company Y’ which was based in ‘Country A’ with a subsidiary in the UK.   W had previously had a career in events management, earning up to £50,000 pa, but was now pursuing a competitive sports career as of 2021. She has aspirations which appeared ‘not to be unrealistic’ to compete for Team GB in the 2028 Olympics.

The parties did not have any children of the marriage although H had two children from a previous marriage. The duration of the marriage was (after a slight skirmish) held to be 11½ years and was therefore not a short marriage.

Computation 

The majority of the asset schedule figures were agreed with some issues about liabilities.   The main task for the court was to determine the value of Company Y and how its value should be distributed.

H held a 100% shareholding in Company Y. An SJE was appointed to assess the value of H’s shareholding.  However, following H’s successful Daniels v Walker application, a second expert was also instructed. Whilst the experts agreed on an EBITDA figure, they disagreed on the multiplier to be used to calculate an earnings basis valuation.

HHJ Hess reminded himself as to the fragility of business valuations and particularly that of assessing a suitable multiplier. He decided that the figure to be selected should be the midpoint of those suggested by the experts. The experts also differed slightly as to the net debt to be deducted from the headline figure. Again, HHJ Hess took the midpoint of the experts’ suggestions.  On this basis, HHJ Hess found that the net value of the company was £9,976,792.

At paragraph 20 of the judgment, the judge observed that the two experts ‘represented a perfectly remarkable illustration of how competent professionals can take a reasonable position within a reasonable range of conclusions’.   The Judge cited from Versteegh v Versteegh [2018] EWCA Civ 1050 in a reminder of the difficulty inherent in valuing private companies for the purpose of financial remedies on divorce:   He also referred to the recent comments of Peel J in HO v TL [2023] EWFC 215, where he said: “I suggest that the reliability of a valuation will depend on a number of factors such as:

  • whether there are applicable comparables,
  • (ii) how “niche” the business is,
  • (iii) whether the business is to be valued on a net asset basis (for example a property company) or one of the recognised income approaches (such as EBITDA or DCF),
  • the extent of the parties’ interests, and accordingly their level of control,
  • the extent of third party interests,
  • the relevance of any shareholders’ agreements,
  • whether there is a realistic market for sale,
  • the volatility or otherwise of the figures,
  • the reliability of forecasts, and
  • whether the assumptions underpinning the valuation are seriously in dispute.

For a more in depth analysis  of HO v TL can I refer you to my colleague Philip Newton’s recent and insightful article

Matrimonial Nature of Company Y

The court’s next task was to determine the matrimonial nature of Company Y.

It was common ground that H had held shares in Company Y since 2004 six years before the parties met.   In August 2010, Company Y purchased Company X, which was based in England. At the point of cohabitation in September 2010, both experts agreed that the value of shares in Company Y was £1,250,000 before tax. In order to produce a fair figure for present calculations, the judge chose to adopt the method used by Wilson LJ (as he then was) in Jones v Jones [2011] EWCA Civ 41. This is notable because the Jones method is rarely applied in reported cases.

In applying Jones, HHJ Hess determined that the pre-cohabitation purchase of Company X by Company Y in August 2010 was a ‘springboard’ event, as the group turnover figures changed significantly thereafter. As such, HHJ Hess doubled the 2010 valuation figure and applied a share index figure of 1.54, having taken the average of the FTSE All Share Index, the FTSE 350 Index and the FTSE 100 Index of the period between September 2010 and the present. Therefore, HHJ Hess upgraded the 2010 figure from £1,250,000 to £3,850,000. He then deducted 28% to account for Country A tax, thus reaching a final figure of £2,772,000.

The matrimonial portion of H’s shareholding was therefore £9,976,792 less £2,772,000 = £7,204,792.

 Application of section 25 

Applying this analysis to the asset schedule of the parties, HHJ Hess determined that H would need to pay W a lump sum of £3.2 million in order to divide the matrimonial assets in the case equally between them.    In considering the income or earning capacity of the parties, H was considered to have a substantial income of c.£600,000 per annum net from Company Y. W had an earning capacity of £50,000 until 2021 and, despite her sporting goals, would be attributed with that earning capacity.

The standard of living enjoyed by the parties was a high one and it was reasonable to assess W as having income needs over her earning capacity.   The Judge decided that a departure from equality was required because W would be receiving cash (or a copper-bottomed asset) whereas H would be left with the risk-laden shares. As such, the lump sum figure to be paid to W was reduced from £3.25m to £2.5m, leaving H with 62% of the marital assets and W with 38%.

In dismissing the suggestion that there should be a whole life Duxbury Fund for W, HHJ Hess referred to the interim report of the Duxbury Working Party which concluded (at paragraph 4.3 of the Executive Summary) that calculations should no longer default to the life expectancy of the recipient.

Outcome 

This was a sharing case where there was a departure from equality in favour of H due to the unavailability of any assets outside of Company Y.

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