In this case, the court had to determine a fair divorce settlement where the couple’s once enormous wealth had been severely affected by war, creating exceptional uncertainty over the value of the husband’s complex business interests. The case highlights the practical difficulties of valuing businesses amid wartime conflict and limited financial information.
Warfare
The Judge described this as a case in which the parties had enjoyed fabulous wealth which has fallen away as consequence of war in country A.
The husband had established very substantial business wealth by the time the parties started to live together. He was reportedly worth in excess of £565m in 2007. In the course of his oral evidence he accepted that his wealth had at one stage been estimated as in excess of this.
The husband recounted incidents of bombs blowing up buildings, the loss of workforce to the army and his financial institution’s dependence on state debt.
There was also warfare evident in the litigation costs to date: these totalled just over £5m. The Judge described this as a horrifying amount. He noted acerbically:
“…the parties (and the lawyers) do need to look to themselves and reflect on whether or not there might not have been a better way to approach this litigation.”
Sharing or needs?
When dealing with divorce settlements, there are two possible principles of assessment:
- The allocation of assets can be based upon the needs of the parties. This is the principle that applies in the vast majority of divorce settlements: finite resources have to be allocated as fairly as possible so as to meet the needs of both parties in respect of housing and income within the constraints of the assets and income available;
- It is only when needs have been fully met that the sharing principle comes into play. The sharing principle can then involve many abstruse concepts such as marital acquest, springboards, passive appreciation and post-separation accrual.
It is well established that the needs are not calculated at some minimum level, based on mere survival. The needs of the parties are established by reference to the relative wealth and living standards enjoyed during the marriage.
In this case it was argued for the wife that the assessment should be based on her needs: the parties had a lifestyle of abundance, a very valuable main home, and spending of about £12m per year. They put forward a capitalised value of £70m on this basis. This had two advantages:
- All of the valuation uncertainties that were paraded during the hearing were side-stepped.
- The value of the husband’s assets at the start of cohabitation and the question of the marital acquest were similarly avoided.
Valuation experts
Single joint experts were appointed, based in Country A. I use the plural as two experts appeared for the SJE. The wife was permitted the funds to have her own shadow expert. The Judge then stated:
Forceful criticisms were made of the SJE report such that fairness required me to allow a second court expert…
The shadow expert appointed by the wife was therefore given a more formal role in the proceedings.
The Judge was faced with a mountain of documents: he had over 3,100 pages of expert reports and appendices relating to some 35 companies and many subsidiaries. The volume can be explained, in part, by the complexity of the husband’s interests, including a financial institution in need of recapitalising, an insurance company and doubts as to his ownership of certain companies and loans.
The experts gave evidence through hot-tubbing. The Judge made this statement regarding one of the experts:
I record here that as an oral witness [the expert] was thoroughly helpful. He has provided me with Excel spread sheets to work through the effect of my decisions. He would summarise for me each of the issues I needed to decide when otherwise I would have needed to go through the interpreter to have a summary from the SJE. He was better able to adapt to the time pressure that we found ourselves under and provide me with short answers, than did the SJE.
Child’s play?
This expert had stated that the valuation exercise was like trying to do a jigsaw with only half the pieces. This description was embraced by the SJE as an accurate description of the challenges that they all faced.
The SJE had asked various questions regarding significant loans and other balances and had not received any information; they were also not provided with company forecasts for most of the businesses.
The other expert was obliged to undertake his work based almost entirely on the information provided by the SJE in their reports.
Technical challenges
There was an interesting technical difference between the SJE and the other expert: should risk premiums be added in calculating the discount rates or should they be moderated due to the buyer being able to diversify? The Judge preferred the practical advice of the SJE on this point.
It is clear from the written decision that the SJE had used US data and that they had then discounted for size. They had already been discounted for the fact that they were in Country A, and it was argued that this was a double discount.
As an aside it appeared that US data and the views of Professor Damodaran featured very largely in the conclusions reached by the SJE.
There were further differences between the experts as to the use of the build-up model or the capital assets pricing model (“CAPM”). The assets in the companies concerned were largely real estate. The SJE cited custom and practice in Country A; the other expert considered that the valuation also included a degree of double discounting. A subsequent sale of one of the properties at significantly more than the SJE’s figure resulted in their valuations of the real estate companies not being relied upon.
Wrestling with uncertainties
The Judge made the following statement regarding the valuation challenges in Country A:
The obvious reflection that I make on this point is as to the uncertainty of value in times of war. If the husband survives this war with his businesses intact, then he will reap the £80m increase several times over, if the war is lost, he may lose everything.
The above quote encapsulates the challenges that the experts had to address. These were valuations with a paucity of data, an economic background of turmoil and enormous political uncertainty. Such situations illustrate the challenges faced in trying to identify what is meant by country risk and how it should be measured.
Andrew Strickland
Consultant
