The approach that is taken to growth or changes in business value after the date a couple separate is a question that comes up for many of our clients. Those clients may have put off dissolving their marriage at the time of their separation for a number of different reasons.
Commonly a couple might decide to divorce on the grounds of two years’ separation and wait for that two-year period to elapse. In other situations, a couple might want to avoid any disruption to their children’s lives whilst they are going through exams, for example. Faced with this situation, what a couple cannot control is how the value of their assets might fluctuate up or down whilst they are separated – particularly business assets. The valuation can change depending on a whole host of factors well outside the couple’s control.
If the value of the business changes, what happens?
The relevance of fluctuations in asset value following a separation can be limited if the value of the assets up until the date of the separation is insufficient to meet a couple’s reasonable requirements following their divorce. This would generally tend to include housing income and often retirement needs.
If there is insufficient assets up until the date of the separation to meet those requirements, then the courts would be more persuaded by the need to take account of increases in value or assets acquired following the date when the couple separate.
If there is already a surplus of capital acquired until the date of separation however, the courts can take a slightly different approach. It will largely depend on how separated the non-business owner is from the busines affairs and the ongoing effort that the business owner makes towards the company’s success from the date the couple separate.
Where very little effort is made at all by a business owner towards an increase in the company’s value following the date of his or her separation, there is generally a greater likelihood that any growth in the asset value will be taken into account on divorce.
A previous case
As an example of this concept in practice, the case of G v T [2020] EWH 1613 should be looked at. In this case, the couple separated in 2017 but it was not until 2020 that the division of their assets on divorce was considered. In just those three years since their separation, the business value had increased substantially.
The court considered that fixing the valuation of the husband’s shareholding at the time of the separation was unlikely to be fair to his wife. Part of the reason for this was that was that he would have been unable to sell his shares following the separation until June 2018 anyway. Adopting a date for the assumed value when it was impossible for the husband to sell his assets was deemed inappropriate.
The court also took the view that the husband’s contributions to the business had in fact been dwindling in the years leading up to and immediately following the separation. It could be said that the increase in the business’s value occurred in spite of the husband’s contributions rather than because of them. That increase had occured as a result of passive growth, which a court is generally more inclined to share.
Contrast this with the husband’s approach following June 2018 however, when he was said to have begun fully engaging in the business and to have made a firm intervention in order to protect it in the Autumn of 2018. A general restructuring involving a large turnover in its personnel and a significant increase in the number of its employees was said to be largely down to the husband’s contribution. A valuation of the company taking account of those changes was also said by the court to be unfair. The husband should be solely credited for those contributions.
In that case, his shares were given a value of £35.3 million net, which when added to the couple’s non-business assets of £4.3 million resulted in assets of £39.6 million, which the court then divided equally between the couple.
What we can learn from this case
The case is helpful in demonstrating the issues faced by the court when looking at the reality of business management and how contributions towards it after separation should be taken into account. These matters are very much taken on a case-by-case basis and it is vital when advising on these issues that lawyers take the time to understand their clients’ businesses and the inner workings that may have brought about changes in their value.
Only having done that can experienced family lawyers provide reliable advice on the correct approach taken to such increases in value in law. If you or your clients are affected by any of these issues then please do contact our Family team. We would be very happy to help.
For couples going through this during the pandemic, we’ve also produced an article on how Coronavirus might affect the valuation of the business on divorce. You can read that here.