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DE v FE [2022] EWFC 71

This case involved financial remedies proceedings between H, aged 47 and W, aged 43, who had 2 children, 3 and 9 years old.


The parties cohabited for 18-24 months in H's former matrimonial home from his previous marriage [the pre-marital home], which the court concluded had a matrimonial element to W of 30%. In 2009 they moved out, rented and then bought the former matrimonial home in Kensington in October 2013, valued at c. £6million. Both parties were bankers, but in 2016 H left his job to found ABC with 2 colleagues, which became 'almost immediately successful'. One colleague left in January 2017, leaving H with a 50% share in ABC, but with payments due to the departed partner. Later in 2017 H admitted to an affair and left the FMH, W remaining there with the children 9 nights per fortnight. In March 2018, H inherited half his mother's estate, including a share in a Middle Eastern property jointly with his sister [whom he bought out, later in 2019 for $2.4million], and ABC received a payment of $150million, which the court concluded did not post-date the end of the marriage and reflected work done before the parties' separation. Part of that money paid off the mortgage on the FMH. By October 2018, despite attempts to work through their differences, the marriage was over. The court also concluded that there were sufficient matrimonial assets to meet W's needs, leaving H the sole owner of the pre-marital home and that which he received from his mother.

ABC

The valuation of H's interest in this business was the main battleground in the case, and in particular "whether or not an uplift to the trading value of the business should be made to allow for the possibility/probability of what might be described as a "super-receipt" as happened in early 2018". H invested c. $1.2million to start ABC, some from a joint account. In May 2017, ABC entered into a 10-year services agreement with a bank, TC, for an annual fee of $30million. In March 2018 ABC entered into a further agreement with TC, "The Confirmation and Termination Agreement" whereby, in return for payment of $150million, ABC's obligations under the services agreement ended. W argued this was a success fee, whilst H argued it was an amortisation of the remaining 9 years of the agreement. The court accepted H's argument that it was not a one-off fee, but little turned on the point. H continued via ABC to provide services to TC. In valuing ABC and to estimate the upside addition in value of ABC for a similar fee accruing to ABC the SJE [accountant] brought in a sum of $200million at 75% chance of receipt in his 1st report in 2020, reducing to 50% chance of receipt in his 2nd report in 2022 to reflect this aspect of value of ABC. More recently, ABC experienced significant challenges requiring H to loan ABC $20.2million, the court accepting that, for legitimate business purposes, 2/3 of that loan will have to be written off.

The court noted that the 4 issues to decide were:

i) Should the upside addition of $20.914m be removed from the valuation of ABC? This was the biggest of the contentious issues.

ii) ABC received a significant shareholding in a quoted company "Q" by way of payment. Should the value attributed to those shares in the valuation be discounted for the reduction of value in the shares since the SJE valuation took place?

iii) When the leisure industry crisis was at its worst and an injection of funds was required into the business, H's business partner paid in a little over $20m in two tranches to the business which was unmatched by H. I have to determine whether this should be treated as a priority debt, as claimed, before H's interest is valued?

iv) Should transaction costs in relation to the sale of various interests of the business in realisation be allowed for?

The court concluded

The upside valuation based on a potential large deal of $200million was too high, looking at the history of ABC's performance and the court reduced this to $150million, further reducing that figure to 30% as representing ABC's likely share, as 70% would go to the deal team, leaving a business share of $45million. The court also reduced the likelihood of such a deal to 33%, producing a weighted fee in such an event of $14.85million, discounted for 2.5 years to produce an uplift in value of $10.65million, rather than the SJE valuation of $20.914million.

The court did not consider that the shareholding in Q was significant since at the time it was received the value of $10million was in the normal range of success fees. That said, the value of the shares had reduced, the court valuing them at $5.4million to reflect payment to the deal team and a 10% reduction to reflect constraints on a sponsor realising the shareholding.
The court saw no reason for removing the priority loan from the valuation of ABC.

The court concluded that transaction costs of 2% should apply to realisation of assets, save in respect of H's interest in ABC, which the court valued at £19.1million, concluding that the value of H's business interests were c. £37.4million, and that, before redistribution, the property assets should properly be seen as being held as to £4.75m (H) and £3.43m (W).  The court noted that the wife earned c. £300K per annum, and H c. $1.1million, but that in any event H's income and potential income significantly exceeded W's, and the W received £14,322 p.a. via CSM and school fees. The court noted that ABC had little liquidity and operated in volatile markets. Citing fairness as the touchstone of the decision the court, the court concluded that, bearing in mind the W's non property assets of £1.32million, an entitlement to 35% of assets resulted in a lump sum payment to her of £9.3million, "unequal division properly reflect[ing] the benefit of the cash that she will receive while H continues his efforts to build up the business.", the wife to retain the FMH valued at £5.91million. The court ordering the lump sum to be paid over 5 years at the rate of £1million p.a. for the 1st 4 years, the balance paid in year 5, interest payable at base rate+1%. The court also ordered nominal spousal maintenance to be activated only if W became unable to work, to be dismissed on payment of the lump sum in full, and for H to pay child maintenance of £25K p.a., credit to be given for payments via CMS, given nanny's costs of £60-70K p.a. to enable W to work, fund the housekeeper "and all her other expenses of living the comfortable, but not ostentatious, standard of living that the parties have enjoyed."

Case summary by Barry McAlinden, Barrister, Field Court Chambers

For full case, please see BAILII