Martin v Martin … in the spotlight again!
In Martin v Martin  EWCA Civ 2866 - the Court of Appeal explores the thorny issue of how to deal with shares in private limited companies when a marriage ends
Mr and Mrs Martin were married for 26 years following 3 years' cohabitation. At the date of the first instance decision they had been separated for 3 years; Mr Martin was aged 68 and Mrs Martin was 54. They had two adult children. This was therefore a lengthy marriage and the sharing principle would apply to division of the parties' assets.
The main asset was a private limited company which Mr Martin had set up with a friend 8 years before he and Mrs Martin began to cohabit. In the same year that the parties married, Mr Martin bought out his original business partner and 1% of the shares were transferred to Mrs Martin, with Mr Martin holding the remaining 99%.
Lord Justice Mostyn had determined that the parties' net capital assets (including 100% of their shareholdings) had a total value of £182 million. Only £21 million of the total wealth comprised non company assets i.e. properties and pension funds.
He also assessed that the marital wealth available for division had a net value of £146 million - 50% of which was awarded to Mrs Martin i.e. £73 million. £40 million of Mrs Martin's award comprised payment of two lump sums of £20 million each payable by Mr Martin over a 2 year period.
The decision also meant that Mrs Martin had non-business assets worth £13.8 million, plus £40 million in cash, and she retained her company shares valued at £19.2 million. Mr Martin retained non-business assets worth £18.4 million and his company shares (valued at £90.6 million) from which he had to find £40 million to pay Mrs Martin.
Mrs Martin appealed the order on the basis that -
- "when determining what part of the current value of the company was marital wealth, the Judge wrongly applied a straight line apportionment from the date of its incorporation;
- in that exercise the Judge wrongly disregarded the fact that, when the parties started living together, the husband only owned half of the company; and
- the Judge was wrong not to provide a mechanism for the realisation of the shares in the company which form part of the wife's award"
Mr Martin cross appealed on the basis that -
- "the Judge wrongly treated the value he ascribed to the company as equivalent to cash and, as a result, awarded the wife an unfair proportion of the non-risk assets: and
- the Judge was wrong to order £20 million of the lump sum award to be paid to the wife within 2 years".
The principle issue raised on appeal was therefore whether Judge Mostyn was right to determine that the value of the company shares was equivalent to cash.
The next issue was whether Judge Mostyn had applied the appropriate approach when determining that only 80% of the value of the shares was marital property to be shared between the parties.
Lord Justice Moylan set out the Court of Appeal's Judgment determining: -
- Assets have different levels of risk that the Court must take into account when applying the sharing principle. The assessment extends to the quality of the assets so that the liquidity and illiquidity are equally relevant factors in their own right.
- Assessment of the weight that a Judge places on a valuation of shares in a private company was not a mathematical exercise but a broad, evaluative process and valuations needed to be treated with caution.
Judge Moylan quoted from the case of Versteegh v Versteegh  EWCA Civ 1050 which referred to Moylan's own decision in H v H  2 FLR 2092 that in his experience, valuations of shares in private companies were among the most fragile valuations that could be obtained -
"the reasons for this are many. In the first place there is likely to be no obvious market for a private company. Second, even where valuers use the same method of valuation, they are likely to produce wildly differing results. Third, the profitability of private companies may be volatile, such that a snapshot valuation at a particular date may give an unfair picture. Fourth, the difference in quality between a value attributed to a private company on the basis of opinion evidence and a sum in hard cash is obvious. Fifth, the acid test of any valuation is exposure to the real market, which is simply not possible in the case of a private company where no one suggests that it should be sold".
- Assessment of marital property - the determining Judge has an obligation to ensure that the selected method is appropriate in all the circumstances and gives weight to the contribution made by one party's non-matrimonial property.
Ultimately the Court of Appeal held that whilst Judge Mostyn was entitled to adopt the straight line apportionment approach when determining what part of the current value of the company should be categorised as non-matrimonial property so Mrs Martin's appeal failed.
However there was a difference between the value of company shares and other non-business assets and this included extraction of cash from the company by way of dividend. Mostyn J had failed to consider whether his proposed award achieved a fair division of both the copper bottomed assets and the illiquid and risk laden assets.
In addition the Court of Appeal considered that the determination that Mr Martin should pay Mrs Martin the second lump sum payment of £20 million by June 2019 was flawed and Judge Mostyn was criticised because there was no evidence on which he could conclude that a further £20 million could be paid to Mrs Martin by June 2019.
The Court of Appeal considered that whilst it could be acceptable for the Judge to determine only the amount to be paid and not how it could be paid when dealing with realisable assets, this was not an acceptable approach to extraction of £20 million from a private limited company.
Whilst Mr Martin succeeded on the majority of his cross appeal as he had not appealed the quantum of the second lump sum payment, the Court of Appeal substituted payment of £20 million by June 2019 with four annual instalments of £5 million which coincidentally had been a proposal originally put forward by Mr Martin.
So what do we learn from the above?
- The valuation of shares in private limited companies is an art, not a science and any valuation needs to be treated with caution.
- Shares in private limited companies are rarely realisable unless the company as a whole is being sold.
- The value of shares in a private limited company do not equate to the value of realisable assets e.g. equity in the family home.
- Non-marital property can be excluded from division, notwithstanding application of the sharing principle arising as a consequence of a lengthy marriage.
- The reality of the options available to parties to raise monies has to be considered when determining the amount and timing of lump sum payments.
The obvious health warning to the above is that in Martin v Martin there was a surplus of assets after needs were met which possibly makes the decision making easier; in more modest asset cases that also include shareholdings in private limited companies the same issues and difficulties will arise, however the available options and choices both for the parties and a Judge are likely to be more limited.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.