The divorce courts have long been sceptical of the accuracy of private company valuations but recent judgments give rise to more uncertainty than ever. Roger Isaacs of Milsted Langdon looks at the matter.
Moylan J described the ostensible accuracy of private company valuations as being no more than a chimera whose purpose was to assist the court “in testing the fairness of the proposed outcome”. His view is shared by many judges and even the most robust forensic accountant would undoubtedly accept that the exercise of valuing shares in a family business for the purposes of matrimonial ancillary relief proceedings is an inexact science.
That inexactitude has been exacerbated by the widely reported case of Jones v Jones which introduces a new degree of uncertainty by means of the so-called “springboard effect”.
The case of Jones and Jones concerned a couple whose total assets at the date of trial amounted to approximately £25million representing, in effect, the proceeds of the sale, in 2007, of the husband’s business.
Forensic accountants for both parties agreed that the value of the business at the date of the marriage, in 1996, had been £2million.
The court held that a deduction ought to be made from the available pool of £25million to reflect the value that the husband brought to the marriage, namely the value of the company in 1996.
One might have thought that that would have caused the court to deduct £2million from £25million to arrive at a figure of £23million to be shared equally between the parties. However that was not the approach adopted.
Instead the court declined to accept the valuation of £2million because it considered that it failed to take into account the latent potential of the business to which it referred as the ‘springboard effect’. Accordingly, in a calculation that was by the court’s own admission “arbitrary”, it ascribed a value of £9million to the company at the date of the marriage. It then deducted this figure from the pool of £25million, concluding that the matrimonial property amounted to £16million, of which the wife was entitled to 50% (£8million) by application of the sharing principle.
The court’s approach creates unwelcome uncertainty for both family lawyers and forensic accountants who assist them.
Clearly it is now more important than ever for consideration to be given, not only to the value of family companies at the date of divorce but also at the time of the marriage. Furthermore it seems that it is necessary to apply a degree of hindsight to the valuation at the time of marriage.
It seems that the question for the forensic accountant is no longer “what would a prospective purchaser have been likely to pay to acquire the business at the time of the marriage?” The answer to that question in the Jones case was £2million and it was this answer that the courts rejected.
Instead the question that the forensic accountant or advising lawyer seems to need to consider is now “what would a prospective purchaser have been likely to pay to acquire the business at the time of the marriage if he had known that, by the time of the divorce, it would have become worth £X?”
As if that were not sufficiently fraught with uncertainty, the position is further complicated by the need to uplift the value so derived to reflect its economic growth during the marriage. In the Jones case this was done by applying the relevant FTSE Index for the sector in which the business operated.
Roger Isaacs is the partner responsible for the Bristol office of independent award-winning tax and accountancy firm Milsted Langdon. He is an experienced forensic accountant accredited by the Institute of Chartered Accountants in England and Wales, a member of the Academy of Experts and a licensed insolvency practitioner