Sarah Havers considers the decision of the Court of Appeal in the case of Martin v Martin [2018] EWCA Civ 2866 and the approach on divorce for valuing pre-marital elements of businesses.

Background

By the date of the appeal hearing, the wife was in her mid-fifties and the husband in his late sixties. They had begun living together in 1986 and were married three years later. They had two children together (both now adults) and separated in 2015. It was a partnership of almost 30 years.

In 1978, eight years before the parties commenced cohabiting, the husband started a lighting business with a friend, which ultimately became Dextra. They were equal partners until 1989, when the husband bought out his friend. From that point onwards, the shares in the company were held 99% by the husband and 1% by the wife.

Mr Justice Mostyn at first instance (WM v HM [2017] EWFC 25) determined the total net value of the assets to be £182m. The judge allocated 20% of the value of Dextra as the husband’s non-marital property acquired before the parties started living together in July 1986. The marital assets were, therefore, held to be £146m. The wife was awarded £72.8m, which equated to 50% of the marital assets and 40% of the assets overall.

There were a number of grounds of appeal between the parties arising from Mr Justice Mostyn’s  first instance decision, but this article focuses only on the approach of the court in determining the value of the pre-marital element of a business founded before the parties married.

Conflicting case law

Mr Justice Mostyn’s decision in 2017 to allocate 20% of the value of his shares in Dextra as pre-marital contributed to the debate as to the “correct” methodology for determining the value on divorce of a non-marital element of a business asset.

The Court of Appeal in Jones v Jones [2011] EWCA Civ 41 adopted a “springboard” approach. In that case, Lord Justice Wilson took the expert valuation of the company as at the start of the relationship (£2m), doubled it arbitrarily (to £4m) to reflect “latent potential” or “springboard” and then applied a percentage increase to reflect passive growth during the marriage (calculated by reference to a relevant index). The result was that the non-marital portion of the business was valued at £8.7m.

In the subsequent lower court decision of Robertson v Robertson [2016] EWHC 613 (Fam), the question for the court was the pre-marital value of the husband’s shares in ASOS. Applying the Jones approach would have resulted in only 2% (£4.8m) of the current value of the business being characterised as non-marital property. The judge considered this to be instinctively unfair and, having regard to all the circumstances of the case, exercised his “broad judicial discretion” to determine that half of the husband’s ASOS shares were to be treated as non-marital property.

At first instance in Martin v Martin, Mr Justice Mostyn considered the Jones “springboard” approach but this would have resulted (on the basis of expert valuation evidence) in the husband’s pre-marital portion of Dextra totalling just 0.7% of the current value of the business (ie £1.625m of £221m gross). Mr Justice Mostyn did not consider himself confined by the Court of Appeal in Jones and to a “strict, black-letter accountancy exercise”.

Instead, Mr Justice Mostyn considered it involved “a holistic … appraisal of all the facts”. He applied a straight line (linear time) apportionment to the value of the business (£221m gross) from the date when the company was first incorporated in July 1978 to the date of the hearing (October 2017). This approach resulted in only 80% of the present value of Dextra being treated as marital property (£177m gross). In Mr Justice Mostyn’s view, the linear time apportionment approach “much more fairly and realistically reflects the true potential of this company at the start of the marriage”.

Court of Appeal decision

The Court of Appeal held that the “springboard” approach in Jones was not intended to be prescriptive. Instead, the “true essence of the guidance” from Jones is that the court must “make fair overall allowance” for a party’s non-marital property. There is “no single route to determining what assets are marital” and the particular approaches in either Jones or Robertson are not binding. The test is the “fair overall allowance” as referred to in Jones.

However, having held that there was no single “right” approach, Lord Justice Moylan went onto say that “whilst it would be an improper fetter on a judge’s discretionary powers to elevate this approach above others, I agreed with Mostyn J’s general observation about ‘the beneficial side effect of eliminating arid, abstruse and expensive black-letter accountancy valuations of a company many years earlier at the start of the marriage’. I also agree that, as he said, it ‘resonates with fairness’ because it takes an overarching view of the weight to be attributed to the husband’s contributions to the business throughout its existence. I would add that it is also an approach which would be consistent with the overriding objective not least because it would save expense by limiting the scope for expensive and time consuming investigations of the development of a business…”

Emma Hatley, partner, commented,

“The Court of Appeal has deliberately not pointed to any single methodology but instead reinforced the discretion of the judiciary to decide on the fairest approach for valuing a pre-marital element of a business. However, it is hoped that Lord Justice Moylan’s comments as to the benefits of Mr Justice Mostyn’s straightforward linear approach will in practice limit the need for expensive, lengthy and inherently speculative business valuations.”

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