‘We can see that the family court are moving further and further away from conventional valuation standards,’ says Luke Morris, the Scrutton Bland partner. Morris was presenting at last Wednesday’s ICAEW webinar Valuation in Divorce. Meanwhile, some of the leading family court judges appear to ‘hold a disparaging attitude toward business valuation,’ added Andrew Strickland, as the two reviewed recent decisions important to valuation. ‘We get a string of adjectives’ from the courts, he said, such as ‘arid,’ ‘abstruse,’ and (Strickland’s favourits, even if the meaning is unclear) ‘black letter.'

While judges increasingly understand the importance of business valuations in divorces involving couples with family companies, some valuation assumptions for quasi-partnerships and fiscal cases (the seller is anonymous, etc.) often do not hold. Others are intact; for instance, most (but not all) divorce decisions that end up in the courts still retain the quasi-partnership concepts that, if there’s no value leakage, and no problematic governance issues, no marketability discount is allowed.

Discounts are normally applied but not if there is no agency problem—for instance, when the people running the business are different from those owning the business. But if relationships are healthy, the courts have been loath to discount minority positions, says Morris.

A new case involved a company owned equally by the husband and wife. The judge did not allow a discount on the 50% share but discounted the value for selling costs and taxes. Other cases such as Sheffield United and UTB (2019) and George and McCarthy (2019) allow for discounts, so there are wide varieties of basis in various court decisions.

In fact, Morris and Strickland both note how many of the principles established by IVS’ ‘equitable value’ and previous case law are cast aside in the interest of meeting the needs of the separating parties. This results in standards of value not seen in any valuation textbook, such as the ‘marriage value’ standard outlined in the recent Estera Trust and Singh case, said Strickland. These new standards of value often sidestep the underlying assumptions of most contentious valuations.

The courts like to keep wide discretion for themselves about what is fair, so that means that some of the judiciary are likely to include ‘judicial caprice,’ says Strickland. First, the courts attempt to address financial need, and then they move to a ‘sharing principle.’ ‘You’d think that only high net worth cases would have anything left after 100% of the assets are applied to meet financial needs,’ says Strickland. It’s also resulted in more standards of value (and methods of valuation) unique to divorce valuation. Morris and Strickland highlighted a number of current trends, including:

• The matrimonial acquest—the asset initially brought into the marriage. This value is different than equitable value because it largely ignores the principle that valuations are conducted on the basis of what was known as of the valuation date.
• The springboard—Another concept introduced in the family courts is ‘the springboard,’ which is the ability of the company to rapidly increase in value in the future. ‘This appears to be the application of hindsight,’ says Andrew. He cites a case where Lady Justice Arden doubled the value the two experts agreed on due to an offer on the business made several years after the marriage date. Family courts struggle to quantify the fact that the momentum of the company was put into place before the marriage needs to be considered, even though the actual value at that time would be much less than the slippery slope of using future knowledge. Other courts dealt with this ‘vexed’ concept of the springboard, notably Judge Mostyn, in Martin and Martin 2018 EWCA Civ 2866.
• The first appearance of DCF models—DCF had not been widely used or accepted by UK courts, but we may be in the midst of a ‘veritable revolution.’ ‘More complex methods of valuation are having to be accepted by the courts since businesses are now using those complex methods.… So, the courts are having to accept the new models,’ Strickland believes.

‘There is little settled precedent in divorce valuation,’ Strickland concludes. ‘We have a role to play in changing these variances.… If we continue to think of, and continue to refer to, IVS 2020, we’ll at least be speaking in one voice.’