This case was heard before the redoubtable Mr Justice Mostyn; at its heart was the valuation of a UK ducting business.
There was a strong international flavour: the wife is 53 and is a Polish national. The husband is 51 and is a German national but is now resident in Dubai. In 1994 they met in London and began a relationship. The same year they married. The flavour is also most acidic: there was clearly very little in the way of trust left between the parties to this divorce.
The Ducting Company
The husband’s family had established a successful ducting business in Germany. It appears that ducting was in his veins. The Judge stated that the husband was born into, and grew up in, the world of ducting; he had done ducting all his life; can only do ducting; and wants to do nothing but ducting.
Against this background it is perhaps surprising that the wife, who trained as a teacher, has been so involved in the operations of the UK company that she wished to run the company and to have total control of it. Under their joint involvement during the marriage, the UK ducting company had prospered and grown to employ at least 50 workers. Profits made were partially left in the company and there were surplus assets, largely comprising listed investments and cash, of nearly £10 million when the SJE undertook his valuation.
The company provides ducting to a wide range of customers in construction, transportation, and other industries. During the COVID pandemic the company experienced a significant decrease in demand.
Out of the Shadows
The financial settlement between the couple was made far more complex by various attempts at nondisclosure: this was a fault of both parties, but the wife’s nondisclosure was on a much lesser scale than that of the husband.
One of the activities in the shadows was the creation, by the husband, of a competing business. Its true ownership was identified by private investigators acting for the wife. The existence of this competing business then impacted on the valuation of Company.
The single joint experts and the valuation
The valuation SJE provided two very clear and readable reports. The tax SJE also produced a very clear, helpful, and readable report.
The valuation was not challenged, and it was not necessary for the SJE to give evidence in Court. He valued the company in the range £13.78 million to £13.95 million, of which the trading element was a midpoint of £3,945,000; surplus assets amounted to £9,920,000. His valuation was based on the financial statements for the year ended 30 September 2019.
Counsel argued that a discount should be applied to reflect the impact of COVID and Brexit. The SJE agreed the principle, but he declined to hazard a figure. The Judge determined a discount of 10% to be applied to the trading element of the valuation only to cover both of these factors.
The non-competition clause
As the matter is a commercial decision for a prospective purchaser, it is difficult to provide a firm conclusion on the discount that might be applied, indeed some prospective purchasers may simply walk away if they perceive the risk is too great. If I was advising a client on a prospective purchase in similar circumstances, I would, if asked, suggest they consider a minimum discount of 10%-20% for an individual not involved in the production/selling side and 20%-40% for someone involved in those areas. These ranges are merely a rough guide……
A deemed sale or a notional sale?
We can all recognise that under the cost approach and the summation method the valuation basis can be Market Value or Liquidation Value. As the intention was for the wife to retain ownership of the Company, it is arguable that there is no need to adjust the value for the costs of sale and for the crystallisation of tax on investment gains.
In this case these adjustments were made: a gross value, after the above discounts, of £12.3 million was reduced to £10.7 million after allowing for selling costs, 100% of taxation on gains, stamp duty on the purchase by the company of the husband’s shares and capital gains tax on disposal of shares by the wife. The allocation was then adjusted so that the non-competition clause discount of 30% was deducted from the husband.
The effect of this basis was that there was no need to consider the valuation of a 50% standalone holding and whether or not a discount was applicable for the lack of control.