X v X: special contributions and discounted share values (part 2)

finances and divorce

In part two of this extended look at the implications of the recent X v X case, Julian explores the husband’s claims in court. Part one is available  here.

In this second part of my review X v X I want to look at the arguments that the husband ran concerning his various contributions. I often come across clients or their spouses arguing that their contributions have been so significant that it justifies a departure from an equal division of assets in their favour. We have, however, come a long way from the case of Mr Cowan, the creator of the bin bag on a roll, and it really takes a truly ingenious, stupendously wealthy superstar to qualify. There are, however, other types of contribution that might also qualify for a departure from equality.

The husband in X v X argued that he had made four different types of contribution. Firstly, that he had brought money into the marriage, including funds to buy their first family home, and used other funds of £500,000. Mr Justice Bodey said he would take the £500,000 pre-marital wealth into account when considering the appropriate reduction from the yardstick of equality because back in 1999/2000 it would have been seen as a considerable sum of money. He also regarded any money that had been put towards the family home as being “swallowed up by ‘matrimonial property’”.

Secondly the husband ran a “special contribution” argument that he was a “genius” in his field and had a company which turned over several billion pounds a year. However, despite the extent of the husband’s financial success, the Judge did not consider that the husband met the legal requirements for an “utterly exceptional special contribution”.

Despite his “business acumen, vision, drive, leadership, energy, problem solving, tenacity, guts, dynamism and downright hard work” (one might wonder if he could have done much more in terms of effort), the way in which the husband had achieved his success was by identifying and seizing an opportunity to “adapt and improve what was already happening less efficiently and less successfully before the Company was started”. This was not, for the Judge, the level of genius established in the Sorrell and Charman cases and, incidentally, the level of wealth created in those cases was also far higher. As a result the Judge considered that there was no special contribution justifying a departure from equality in the husband’s favour.

The husband in this case also argued that he had turned the company around following separation, at which time its future had been in the balance. The Judge agreed with this argument – that the husband had salvaged the company’s fortunes around after the marriage had broken down and therefore the “marital partnership” had ended. Though he could not calculate the value of the husband’s contribution with any precision, he decided that he must take this into account and make some adjustment in the division.

Lastly the husband argued that due to the wife’s alcoholism he had also played a substantial role in caring for the children in addition to his wealth-creating contributions. He accepted that his wife had suffered from an illness and was not alleging that this was conduct or bad behaviour by the wife that must be taken into account. In other words he was not alleging that his wife was at fault but that his contribution in looking after the children in addition to his work was an additional positive contribution that he had made. However the Judge did find that the wife had played as full a role as she could as mother and homemaker. As a result the Judge rejected the suggestion that the husband’s contribution towards the children and domestic life were unmatched by the wife.

Is it appropriate to discount the value of the husband’s shares on the basis that he holds a key role in the business regarding its future prospects?

This issue has been considered before in the cases of Sir Martin Sorrell and John Charman, who both argued that their particular sparks of genius were intrinsic to the value of their shareholdings and thus without their ongoing involvement would be worth significantly less. The husband in this case considered that there should be a substantial 40 per cent discount to the value of his shareholding before division with his ex-wife, whereas she argued there should only be a 2 per cent discount.

The Judge observed that any assessment of the appropriate discount was trying to estimate the unpredictable because the outcome of any sale of the husband’s shares would depend on market factors at the time of the transaction. In the end he decided to apply a discount of eight per cent, having heard a whole range of competing arguments from various experts. A relatively modest discount in the circumstances seems fair given the speculative nature of this argument.

A claim advanced for the wife – that the husband could borrow against the value of the shares and therefore in not selling them no tax would be payable and no discount to their value would need to be applied -was rejected by the Judge, referring as far back as the judgment of Lord Nicholls in White v White [2000]. Lord Nicholls had said that the normal costs of sale should be deducted from the value of an asset to enable the court to compare one type of asset with another- e.g. property against cash in the bank on a like-for-like basis.

Incidentally for those who are interested, the wife ended up with 37.5 per cent of the assets as she had asked for. This included an income fund of £3.8 million to meet her lifelong income needs.

Though it is quite a long judgment, which is not surprising given the number of different issues that were being argued, there are plenty of relevant points that are well worth a read. A number of businessmen have tried to run arguments about their exceptional contributions and failed to get over what is a very high hurdle.

Perhaps the decision of the Court of Appeal in the case of Gray v Work – due in the next few months – will shed further light on this thorny issue and finally put it to bed.

Image by Owen Moore via Flickr under a Creative Commons licence

Julian Hawkhead

Julian Hawkhead is Stowe Family Law’s Senior Partner and is based in our Leeds office.

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1 comment

animes - February 19, 2017 at 12:20pm

I disagree.

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