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The Generation Game – values, intergenerational assets and the divorce court

The Generation Game – values, intergenerational assets and the divorce court

Thursday 13th December 2012

The Court of Appeal has just heard arguments on whether inherited business assets should be ring fenced when making divorce awards. The case involving Mr and Mrs Davies was reported on 11 December 2012.

Mr Davies is a successful hotelier who started in the hotel industry through his grandfather setting up a hotel and passing the property on to Mr Davies’ father who in turn left the hotel to Mr Davies and his two sisters. During the course of his relatively short marriage, Mr Davies bought out his two sisters from the hotel business and the scene was set for Mrs Davies’ financial claims.

At the time of Mr Davies’ marriage to Debra Davies he owned a one third share in the hotel business and by the end of the marriage one hundred percent. Although the Davies’ marriage was short lived, the contentious issue was the value to be placed on Mr Davies’ share of the hotel business. Mr Davies argued that the entire value of the hotel business should be ignored given the intergenerational transfer of the hotel to him and his wife’s limited role as a receptionist at the hotel.

Mrs Davies successfully argued that it was her hard work and marketing know how that had resulted in the hotel rising dramatically in value during the course of her admittedly short marriage to Mr Davies.

Although the high court judge had before him a joint expert accountant report he was also assisted by two independent valuations provided on behalf of Mr and Mrs Davies. However, none of the three experts had valued Mr Davies’ interest in the hotel business at the date of transfer of Mr Davies senior’s shares to Mr Davies.

Not surprisingly, Mr Davies argued that at the time of transfer of the shares into his name the shares were of substantial value. Mrs Davies argued that they had a nominal value.  Limited historical information was available.

The high court judge concluded that, although it was not possible to try and value Mr Davies’ interest in the business at the time of the transfers of shares from his father and sisters, it was fair to take a broad brush approach and exclude one third of the current value of the hotel business . Therefore the court only adopted the sharing principle to the value of two thirds of Mr Davies’ shares.

This approach resulted in an award of £2.2 million to Mrs Davies in addition to her receiving the family home. Mr Davies appealed arguing that the high court judge should have awarded Mrs Davies only £1.5 million through removing from the schedule of assets all of his interest in the hotel business.

Although lord justice Thorpe said, in the leading court of appeal judgement, that the high court judge was in error in saying that the husband’s business had no value at the date of Mr Davies’ acquisition of the shares from his father the high court result was nonetheless correct and the award of £2.2 million should stand. The court of appeal accepted that as Mrs Davies had conceded that one third of the value of the husband’s business assets should be excluded from the schedule of assets that this concession reflected, in broad brush terms, the derivation of the hotel and its goodwill value.

What should business owners take from the Davies litigation?

  • If you want to ring fence intergenerational assets think about entering into a prenup or postnup or placing the asset in trust.
  • When instructing an accountant consider whether you need to invite the accountant to look at the value of the business at the time of the commencement of the relationship or at other key dates such as the date of the intergenerational transfer of shares and provide full instructions and the historical information.
  • If you want to avoid arguments about the factual matrix of the marriage avoid employing a husband or wife in a family business.
  • Think about the factual matrix if you end up in litigation – Mr Davies’ case was not assisted by his assertion that Mrs Davies was little more than hired reception help – the high court and court of appeal accepted that Mrs Davies’ contribution towards the goodwill value of the hotel business was significant. The evidential discrepancies may well have coloured the court’s view on the level of award – it does not always pay to minimise contributions.

If you would like more information about the Davies decision or for personal help with regards to your own business and family law issues please contact the Family team.