Friday, January 28, 2011

Jones v Jones: Valuing a company at the date of marriage

A quick summary of Jones v Jones [2011] EWCA Civ 41, reported today:

The facts: The parties were married in 1996, at which time the husband was the sole owner of a company. In May 2007, when the proceedings for ancillary relief were under way, the husband sold the company and received the net sum of £25m. In February 2010 the court made an order for ancillary relief in favour of the wife, under which she was awarded a lump sum of £5.4m (including £0.4m costs), on a clean break basis. The wife appealed, contending that she should have been awarded the sum of £10m.

Held: In the leading judgment, Lord Justice Wilson stated that the appeal raised a point which he formulated as follows (at paragraph 4):
"When an asset of a spouse – in this case a husband – represents the proceeds of sale of a company which he brought into the marriage and built up during it, how is the attribution of part of the proceeds to the husband's ownership of it at the date of the marriage to be conducted for the purposes of the sharing principle and, in particular, does the exercise of attribution permit focus not only on the value of the company at the date of the marriage but also on the husband's personal capacity at that date to build it up in the future?"

The High Court had found that the net assets of the marriage were £25m and that 60% of the net proceeds of the sale of the company represented what the husband had brought into the marriage, i.e. £15m. That therefore left assets of £10m, of which the wife was awarded half.

The judge had arrived at the £15m figure in the light of the agreed fact that the value of the company in 1996 was only £2m. In so doing, Lord Justice Wilson found (at paragraph 21) that the judge was capitalising the husband's earning capacity at the date of the marriage and was proceeding to treat such capital as a non-matrimonial asset. He held (at paragraph 26) that this approach was wrong, thus overruling the decision in GW v. RW (Financial Provision: Departure from Equality) [2003] EWHC 611.

Lord Justice Wilson then considered what value should be ascribed to the company as at the date of the marriage, and found there were two reasons why the sum of £2m required substantial adjustment: the company's latent potential (or 'spring-board') and an allowance for passive economic growth in the company between the date of the marriage and the date of sale. By reference to its latent potential at the date of the marriage he took the value of the company at that date as being £4m rather than £2m (paragraph 43). He then used an appropriate FTSE index to allow for passive growth (paragraph 50). This lifted the figure of £4m to £8.7m, which he rounded up to £9m.

Accordingly, the value of the matrimonial assets was £25m - £9m = £16m, and the wife was awarded half of this, i.e. £8m (paragraph 51), which represented 32% of £25m, which Lord Justice Wilson considered (at paragraph 52) to be within the bracket of fairness.

The wife's appeal was therefore allowed, and the award of £8m substituted for the judge's award of £5.4m (Lord Justice Wilson felt that the award would enable the wife to meet her need referable to costs).

Lady Justice Arden and Sir Nicholas Wall P gave consenting judgments.

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