How ‘uncertain assets’ complicate divorce
Complex, speculative assets are increasingly common in family finances, making divorce settlements a legal minefield, especially for the less well-off spouse, writes Family Partner, Emily Brand.
Many divorce survivors live in dread of the moment their ex rocks up in a glamorous sports car to collect the children for a surprise holiday. And when such sudden good fortune is casually explained as the unexpected windfall of an asset that ‘came good’, the chances are that the next phone call will be to their family lawyer. After all, if the pie was divided equally in the first place, why does it now feel like a dish best served cold?
Given that family finances increasingly involve complex speculative assets, the fair division of such is fraught with difficulty. Are shares in a business ever worth as much as cash in hand? It often depends on who has control. There may be little point taking shares in a family company in which your ex reigns supreme if she will never sell and your chances of realising any value are the same as winning on the lottery. And how do you value those shares in the first place when the owner may be holding all the cards close to his chest? It may be more financially prudent in the long run to keep the more secure ‘copper-bottomed’ assets such as property.
How do the courts deal with these issues? Two cases remain key: that of Wells v. Wells (2002) and Myerson v. Myerson (2009). In Wells, the husband retained majority shares in the business and cash, with the wife retaining over £1 million in ‘solid’ assets. The judge was unable to put a value on the business, the performance of which was declining. On appeal, the husband’s share of non-business assets was increased, the Appeal Judge commenting that ‘sharing is achieved by a fair division of both the copper-bottomed assets and the illiquid and risk-laden assets’, in any situation that results in a ‘clean break’ – in other words, a settlement that ends all ongoing financial obligations between the spouses.
To effect this aim, the Courts may therefore choose to divide the assets according to the nature of each, in order to provide a fair division of the liquid and illiquid assets and, if need be, it will discount illiquid assets. It could also transfer shares from one spouse to another. In the recent case of WM v HM (2017), however, Mr. Justice Mostyn described the transfer of shares in the husband’s company to his wife as a ‘matter of last resort, as it is a antithetical to the clean break’. Despite this being ‘strongly counterintuitive’, he then went on to increase the wife’s minority shareholding on the ‘grounds that it was not so objectionable if it only applies to a minority element’ of the wife’s award.
In the Myerson case, the husband agreed to take his 57 percent of the assets predominantly by way of shares in an AIM-listed company, of which he was a shareholder. Crucially, this agreement was made in the early months of the 2007-2009 financial crisis. In the following months, those shares fell from £2.99 to 27.5 pence making the division 86 percent to the wife, and 14 percent to the husband. Despite the catastrophic fall in the value of the shares, the husband’s appeal was rejected on the grounds that ‘the natural processes of price fluctuation, whether in houses, shares, or any other property, and however dramatic,’ do not provide grounds to set aside an Order.
The Court of Appeal went on to detail two further factors as to why the husband’s appeal had not succeeded. Firstly, the order was not imposed – the husband knowingly agreed to an asset division that left him captain of the ship (if not quite master of his fate). Secondly, even given the disastrous fall in the share price, the husband still had the chance to recover his fortune, since ‘unusual opportunities are created for the most astute in a bear market’.
It is often said that women tend to be at a disadvantage in divorce settlements because of their allegedly more limited grasp of the family finances and their tendency to be more risk-averse. As this decision shows, however, a party’s knowledge or expertise may equally turn out to weigh against them – particularly if the final settlement was voluntarily agreed.
Of course, such issues are purely academic if there are only enough funds to provide one house for the children. If further assets are available, however, and sharing them remains an option, the question for any family lawyer must be the extent to which they should advise their client to take on such risk-laden prospects.
With the future uncertain, the safest answer is a qualified ‘yes’ – so long as they are sufficiently balanced with ones that have more ‘copper’ to them. And there’s still ‘no place like home’. If a settlement leaves one spouse homeless, or another believing that they have been ‘cheated’ out of a fortune (because of a risk-averse decision), further litigation is sure to ensue.
So as another old saying doesn’t quite go: settle in haste, repent at leisure. (Is that the sound of a Porsche outside…?)
This article was first published in Spear’s on 24th April 2018.