The case of Gallagher and Gallagher  EWFC 53.
This divorce case was heard by the redoubtable Justice Mostyn. He has previously expressed his negative views on business valuation as black letter accounting, a phrase of uncertain meaning. In this case, he referred to the valuation methodology as being (A X B) + C, where A is the future maintainable earnings of the business, B is the appropriate multiplier to be applied, and C is the amount of the surplus assets. Readers must draw what conclusions they will from this distillation.
The Judge also expressed his concern at the costs being expensed by the parties on legal advisers and business valuers. He stated: “In the two years since the wife's Form A the parties have incurred costs in the extraordinary amount of £1,670,380, or 5% of the total assets.” His concern was heightened as the only significant asset to be valued was a 50% shareholding in Galldris Construction Limited. He described the case as very straightforward, with under two days being spent in Court. He stated: “The case should have been capable of being dealt with quickly and economically.”
The Technical Issues
The main area of dispute was the likely level of maintainable future profits. The directors had made the decision to move from being a Tier 2 contractor to a Tier 1 contractor, engaging directly with the public sector and other bodies. The trade-off was, in the simplest terms, greater stability and lower profit margins from graduating from Tier 2 to Tier 1.
The Judge found that the business was indisputably a quasi-partnership with no question of discounting the husband’s interest of 50%. Notional capital gains tax was deducted in deriving a net interest.
Justice Mostyn has devised the linear method for calculating the acquest. This is in contrast to the need to value the business at the start of the marriage. It also sidesteps the major challenges of trying to separate the passive from the active appreciation in values during the marriage.
This company was extremely successful: Its accounts for the year to March 2019, being the last accounting year before the separation, show that turnover had by then reached £74 million with a pre-tax profit of £5 million. The adjusted profits before tax for this period were over £12 million.
A single joint expert was appointed to value the shares. Each of the parties objected to her valuation. They were each given permission to appoint their own business valuation expert.
The Judge stated that he had no concerns about the impartiality of one of the experts. However, he had critical comments to make about the other. He began by stating: “I acknowledge that [the expert] is a highly proficient, knowledgeable, intelligent, and articulate accountant who has fully immersed himself in the detail of the operation of Galldris.” He then went on to use a colourful phrase, stating that the expert walked on the pavement hand-in-hand with the husband. The context for this remark was an extended metaphor stating that it was the duty of the expert to walk down the middle of the road and not to join his client on the pavement (this metaphor is favoured by Justice Mostyn: he has used this in at least one other 2022 case).
The Judge went on to say: “His written evidence put forward figures for A and B which were as low as he could tenably go without falling off the spectrum altogether. They were not impartial figures.”
Despite these criticisms, the Judge accepted the evidence of this expert with regard to the prospects for future earnings. There were no budgets for future years. The experts therefore examined the results of past years to try and divine the future.
He also briskly disposed of any argument of there being a springboard of strong profits growth within the Company.
In the Hot Tub
A Personal Observation
The General Role of Experts
Justice Mostyn made extensive comments in his written decision regarding the duties of experts. This included the following: “Solemn statements have been made for decades about the duty of experts to be impartial, but I have yet to see in a financial remedy case an expert, instructed and paid for by one party, give evidence adverse to that party's interests and strongly in favour of the other party's.”
As business valuers we are accustomed to the concept of sample selection bias and its ability to lead us along the wrong path towards false conclusions. It is possible that the above critical comment about experts does not recognise that clients can choose not to submit expert evidence if it is not supportive of their position.*The views expressed are the author's and not ICAEW's.