If a business owned by a spouse before marriage increases significantly in value during the marriage, how should it be treated in a divorce?
Should the business still be considered ‘non-matrimonial’ property, exempt from a simple division in two? Or if it is partly matrimonial and partly non-matrimonial, how should you determine the value of each part?
These were questions the Court of Appeal had to deal with in the recent case of Martin v Martin.
The husband was aged 68 and the wife 54. They began living together in 1986, married in 1989 but separated in 2015. In 1978 the husband and a friend had started a business and the husband bought his friend out around the time of the marriage; the company became very successful. An expert accountant valued it twice in the space of a year during the litigation – first at £130m to £166m and then at £185m to £227m.
During the divorce settlement the judge took a value of £221m before tax and costs of sale. He then had to decide what proportion of the company value should be classed as matrimonial, and therefore shared between the parties. In doing so, he rejected the figure that the expert had put on the company as at 1986, when the husband and wife started to live together, on the grounds that it did not fairly and realistically reflect the company’s potential.
Instead he took a “straight line” approach from the date of incorporation to the current valuation. The effect was to put a higher 1986 value on the company, with the result that only 80% would be considered matrimonial property.
So 80% of the value of the company went into the matrimonial 'pot' for division, while 20% remained the property of the husband.
The Court of Appeal supported the judge’s approach to the valuation of the company before the marriage, noting that judges can determine what constitutes non-matrimonial property with such generality or particularity as they see fit. Essentially the judge is not bound by a strict mathematical approach and has a very broad discretion.
This suggests that conducting an expensive detailed investigation into a company’s mathematical value years ago at the start of a marital relationship may well be a pointless exercise. However judges may take differing approaches, so it is difficult to be definitive and the appropriate strategy for each case will need to be considered on its facts.
The effect of the judge’s overall division of the assets was to give the husband 60% and the wife 40% of the total. The wife received some shares as part of her award as well as cash and property.
The court considered the treatment of business assets generally. There is a principle that when deciding on a fair division of the assets, a court must take into account not just the value but also the nature of the assets.
The husband argued that in the first instance judge had given the wife too great a proportion of the 'copper bottomed' assets – essentially cash and property - whilst leaving him with more of the risk-laden assets in the form of the company shares. The wife's shares represented 26% of her total assets of £72.8m whilst the husband’s shares represented 83% of his wealth of £109m.
The Court of Appeal agreed that valuations of private companies can be fragile and need to be treated with caution. Shares in a company are not the equivalent of cash but have a “different quality” and the judge had not properly considered whether his judgement amounted to a fair division of the different types of assets.
This case underlines the importance of business owners taking specialist legal advice and, if possible, looking to agree in advance how company assets would be dealt with in the event of a divorce. A pre-nuptial or post-nuptial agreement can help to avoid uncertainty and keep business assets intact in the event of relationship breakdown.
Published: 23 January 2019
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