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Case note: WM v HM [2017] EWFC 25

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In a tweet: Using the linear time approach to assess historic business valuation

Summary:  Here we see Mr Justice Mostyn considering the various approaches to assessing the historic value of a business.  

The husband (“H”) and wife (“W”) had been in a relationship for 29 years including pre-marriage cohabitation. Prior to the relationship starting, H had established a business (“XG”) with a business partner in 1978, whom H had bought out in 1989. The business had gone on to be very successful and was now valued at £221million. The family had enjoyed a high standard of living.  

H sought a departure from equality on the following grounds: 

  • the business was founded prior to the relationship commencing; and 
  • that he had made a special contribution.

Held:  Mostyn J considered the issue of a historic valuation by reference to the percentage change in the relevant FTSE all-share sector, a linear time apportionment and a discounting approach (or Lockean method) taking 5 per cent and working backwards from the current value of XG. 

He ultimately adopted the linear time approach despite it being based on an artificial assumption of straight-line growth up to an eventual sale of XG (following Jones v Jones [2011] EWCA Civ 41). He justified its use as it reflected the latency of the business when the relationship formed, and that, intrinsically, value is as much a function of time as it is of work or market forces. The decision highlights that the formation of a value judgment about the historic value of an asset is subjective but has to have some evidential basis. The evidence is not confined to a strict black-letter accountancy exercise. It involves a holistic, retrospective, appraisal of the facts and the application of a subjective conception of fairness, overlaid by a legal analysis. Using this approach, the judge determined that £44million of the business was attributable “non-matrimonial”.  

However, whilst making £145m over the course of a long marriage was a highly creditable achievement, it did not meet the standard of rarity (“as rare as a white leopard” [28]) needed to justify a highly discriminatory unequal division of the product of the matrimonial partnership.  

As a result, the judge concluded that it was appropriate for W to receive an equal share of the £182million matrimonial resources i.e. £72,876,484 or 40 per cent of the total asset pot. H had planned to sell the business on his retirement which was envisaged to be in about 7 years. The minority of W’s award (26 per cent) would be met with an enlarged shareholding of the business (she currently had a 1 per cent shareholding; this would increase to 17.5 per cent). Although a Wells v Wells [2002] approach “should be a matter of last resort” [24], Wells sharing is not unreasonable where it only applies to a minority element of the overall award, as it did here.  

In calculating the net assets the latent tax had to be assessed on the basis that a very large dividend would be paid in order to give H the means to pay W a substantial lump sum, while at the same time allowing him to continue working in and on the business. The dividend tax rate of 38.1 per cent was higher than the capital gains tax rate of 20 per cent. That meant that the overall net value of the assets was slightly less that it would have been on a notional immediate sale, and that the value of W share was correspondingly less but in all the circumstances that was not unreasonable.

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