John Hooper & Co

Solicitors

Newsletter 4 – The valuation of private limited companies and maintenance Orders

VALUING MINORITY INTEREST IN PRIVATE LIMITED COMPANIES

A lot of time and money has been expended over the years to address the very thorny subject of valuing minority interests in private limited companies. Reports prepared by Forensic Accountants can cost several thousand pounds and yet two or more valuations of the same company can produce significantly different figures because there are various methods of valuation coupled with differing views of the applicable multiple and level of discount to be applied. Such a minority interest was considered in the case of A v A which was decided in 2004 but not reported fully until 2006. In that case the Judge, Mr Justice Charles, was very critical of the fact that a lot of money was spent on valuations of the wife’s minority shareholding in a company. He recommended that issues concerning private companies should be viewed not only from a matrimonial litigation perspective but also from a business and business litigation perspective. In this way, “a viable and pragmatic business solution might then become apparent which would avoid the uncertainties and difficulties of valuation and authorising of finance, albeit that it might not involve a clean break”. In A v A Mr Justice Charles said that if a pragmatic exercise had been carried out at an early stage, it would have become apparent that it was unlikely that the wife could realise her shares at an attractive price unless they were bought by another shareholder or by the company; and that a forced sale would be difficult to achieve and would almost inevitably be at an “unattractive price”.

Clearly some expert assistance is required to make that initial assessment as to whether the minority shareholding is, indeed, likely to be restricted in value (for instance, because, as is usually the case, the shares have to be offered internally and approval of any transfer of shares is subject to the director’s absolute discretion). A number of Forensic Accountants are willing to provide that sort of initial brief opinion either free, if the work involved is very modest, or at a relatively moderate cost.

MAINTENANCE ORDERS AND THE RECIPIENT’S SUBSEQUENT COHABITATION

In the case of K v K the wife had the benefit of a Spousal Maintenance Order. She subsequently engaged in a settled period of cohabitation with another man. The Spousal Maintenance Order had been made by Consent in 1998 at the rate of £60,000 per annum, index linked.

The husband applied to vary the wife’s maintenance to a Nominal Order. At the subsequent hearing the wife accepted that there should be a slight downward variation but argued that her cohabitation was irrelevant. Mr Justice Coleridge expressed dissatisfaction with the state of current legislation insofar as it inappropriately dealt with cohabitation issues. He said that “considerable weight” could be placed on a period of settled cohabitation. He therefore took into account, when considering the level of reduction of the wife’s maintenance, the fact that the wife had not been able to avail herself of the benefits of a Pension Sharing Order at the time of her divorce (which took place prior to December of 2000). He, therefore, decided not to interfere with the bulk of the Order. The Judge also felt that his hands were tied somewhat by previous judicial decisions which had stressed that “cohabitation must not be equated with marriage” and as such, should not necessarily bring an end to a Maintenance Order.

Finally, Mr Justice Coleridge expressed the hope that one day the legislature would recognise that people’s lives and lifestyle had changed dramatically, even in the last 10 years, and that the law should develop to accommodate these changes. Mr Justice Coleridge’s words will, no doubt, be echoed by the more modern thinking elements of the Judiciary. However, until Parliament steps into correct this anomaly, Spousal Maintenance Orders will continue (albeit at a reduced level) in spite of long term cohabitation.

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