B v B

The principle that the marital acquest (i.e. the wealth generated by the parties’ joint efforts during the marriage) should, on divorce, be split equally between them is now both uncontroversial and normally the starting point for determination of financial remedy proceedings, at least in so far as they involve the distribution of capital assets. However, the actual process of achieving that equal split can, in all but straightforward cases, be fraught with complex argument even when, as in this case, the parties have managed by sensible negotiation to agree the percentages, values and precise distribution of almost all of the major existing and future assets.

Thus the parties in this case agree that the overall value of the presently available assets is of the order of £40 million and that in principle that sum should be divided, as nearly as possible, in half. And they agree about the destination of all but one of the important assets and many of the less important ones. There remain however 6 issues about which they cannot agree and where the court is required to adjudicate. They are:

The hearing lasted (with reading time) five days. I had available thirteen lever arch files of documents (mercifully and practically reduced to a core bundle). I also heard oral evidence from the parties and one forensic accountant. Both parties were palpably honest witnesses doing their best to recall past events and trying to be reasonable to the other side’s case consistent with advocating their own. I found the husband’s recall was however a little more reliable. In addition I had written (and oral) arguments of the highest quality both at the beginning and end of the case. And many schedules from both sides.

For convenience I shall call the parties husband and wife. They have in fact been apart since November 2010, and the decree nisi was pronounced on 1 September 2011. The essential facts are few, not significantly controversial and can be shortly stated. Both sides have produced a written chronology.

The Wife is almost 54. She describes herself as a ‘full-time mother’. At the time of the marriage she was a fully qualified solicitor working as a commercial property lawyer. She continued in that employment until shortly before the birth of her first child in 1995. The husband is now almost 57. He describes himself as a ‘fund manager’. He is a Partner of MaisonBlau Capital Partners (“MaisonBlau”), a prominent Private Equity Investment house where he has worked for almost 30 years – i.e. since before the marriage.

The parties began living together in 1988 and married in mid-1990. The marriage broke down in the late summer of 2010 from which time the parties had separate bedrooms, and in November of that year the husband left the matrimonial home. This is therefore a marriage of just over 20 years, although preceded by a period of cohabitation extending it, for these purposes, by two years.

There are two children; Natalie born on 3 October 1995 (so now 17½ and in her last two years at St Augustine’s School) and Abigail born on 8 November 1999 so now 13. She is in her second year at St Augustine’s. Both are ‘based’ with the wife in the former matrimonial home in NW1 (“the Primrose Hill property”), but spend time with the husband in his new home in Chelsea.(“the Chelsea property”).

The family have enjoyed a very high standard of living – especially during the latter years of the marriage – generated from the husband’s very high remuneration from his position as a senior member of MaisonBlau.

The final matrimonial home was in Primrose Hill, bought in 2002. They also had a country property near Horsham , an apartment in Verbier ‘La Chalet’ (bought in 2005) and, latterly, the “disputed castle” in Fife, Scotland; ‘Falkirk Castle’ bought in 2007.

They also own a sailing yacht ‘Nibali’, and a mooring in Palma, as well as three other smaller sailing boats (sailing is the husband’s particular recreation). They have had, and continue to have, luxury cars, personalised number plates and a generally high material standard of living. The cars include a Bentley Continental, an Aston Martin, three Range Rovers, two Land Rover Discovery, an E-Type Jaguar and a Cadillac Escalade.

The total current assets, excluding anticipated future MaisonBlau receipts, are almost exactly £40 million. Including those anticipated future receipts to which a value can presently be ascribed the total is about £52m.

There have been detailed asset schedules produced by each side and updated as the case progresses. A broad summary is in the table below. I agree with Mr Lewis Marks QC when he says in his opening note “However, in the context of a case with assets (on any view) of around £40m and where the bulk of that figure is comprised of estimates – albeit in many cases agreed estimates – of values of real properties which are to be retained and investments in private companies, we submit that any attempt at ‘precision’ is artificial, disproportionate and illusory”. I would add “and unnecessary”.

There is no dispute that those assets are to be shared broadly equally although, as already mentioned, there is an issue about whose share is to include Falkirk Castle. At the outset of the hearing there was a separate dispute about the value (if any) to be ascribed to the planning potential uplift on the Primrose Hill property if the basement was to be developed. However the husband, very sensibly, abandoned that point having heard the wife’s evidence and an early judicial hint. The valuation of planning gain is even more speculative than usual and to have gone down that route would have, I think, been a step too far.

Nothing more need be said about the background. The principles governing the decision are those contained in The Matrimonial Causes Act 1973 (as amended) and the many cases since 2000 when the court’s approach was refashioned to establish the principle that wealth jointly built up during marriage should be equally shared. The aim is to achieve overall fairness taking into account all the facts and figures, precedents and arguments. The exercise is essentially a discretionary one.

Fairness however is not necessarily a product of precise arithmetic. It is more, I think, the product of the court giving due recognition to reasonable arguments on both sides.

Both sides have produced very detailed schedules. There is very little between them. I shall work from the husband’s only because I find it a little clearer. The total, as I say, is a few pounds short of £40 million for the presently available assets. On the basis that the husband keeps Falkirk Castle and I accept his valuation for the yacht (and I ignore the cars) equality is achieved by the payment of a lump sum to the wife of £5.35 million or £5.89 if she receives her share of the Ermine Street/Escher loan money now. If the wife keeps Falkirk (at her lower valuation) the equivalent figure for the lump sum is £3.093 million.

The wife now has none although she once was a city solicitor. On the other side of the balance sheet the husband has an enormous earning capacity which he can deploy for some years yet. For the past three years his post tax income has been between just under £3million and £3.7m per annum. At one time he was talking of retirement but he has now abandoned that idea. Although nobody has ever suggested that this (or for that matter any) huge earning capacity can or should be valued as such, it is, I think, in all fairness, a factor in the equation. This is an inalienable ability to continue to amass huge wealth way above the husband’s strict need for income. Although the deployment of the ability would post date the separation, the ability, was nevertheless largely acquired and honed during the marriage. In other words he keeps the money making engine and, in fairness, in this case at least, it cannot just be ignored, in my judgment.

No one has suggested that there is any difference in the parties’ respective different contributions to the marriage and the family. They both played a full part. I decline altogether to consider the parties’ financial needs beyond saying that both can amply meet their expected and respective very substantial, though in the context reasonable, financial needs out of what it is agreed, on either case, each should keep. Beyond that, this part of the debate becomes sterile.

This is not the most significant issue in terms of value but it is I think in terms of the parties’ hopes and wishes for the future. Both are desperate to keep it. So much so that the husband is prepared to accept a much higher value than the wife (£3.6m as opposed to £2.2m) if he retains it by way of a demonstration of his strong feelings for the place. It is a 16^th century castle bought in 2007 and said to be in very good condition. Both spoke movingly in evidence about their love of the place. The wife says she sees herself moving there to live full time one day.

There are no precedents or practises which assist the court in this sort of exercise and there is little to choose between the parties’ arguments. In the end the court is no more likely to achieve objective fairness than if the parties had agreed to draw lots or toss a coin.

However, having thought about the competing merits carefully, I have come down in favour of the husband for two main reasons.

The resolution of these issues involves a difference between the parties of many millions of pounds and unsurprisingly they have dominated the proceedings. They are far from straightforward and the arguments advanced on each side are powerful and well reasoned. Many pages of written argument (with supporting schedules and charts) have been submitted in support of each party’s position as well as many minutes of oral expansion. I am not going to repeat or even attempt to summarise all the points made. I have thought about them carefully.

There are two elements to this part of the wife’s claim to share in the future fortune generated by the husband’s involvement in this private equity firm. The co-investment element and the carried interest element. The husband’s counsel in their opening note set the scene in fair and simple terms and I borrow heavily from it to provide a basic explanation of the issues:

MaisonBlau is a prominent private equity house in the UK..

MaisonBlau’s modus operandi is the de facto standard private equity model:

MaisonBlau has raised a number of funds since its inception. As each fund nears full investment (i.e. the commitments to the fund have been almost exhausted in acquiring businesses), a new fund is ‘opened’ seeking investors to make fresh commitments. The current funds in existence are designated A, B and C. All earlier funds have been fully realised and the proceeds distributed to the investors and to MaisonBlau.

Equally, the business model of MaisonBlau follows the familiar pattern:

So it is that the husband’s potential future receipts from MaisonBlau comprise (or, at least, depending upon the success of the underlying businesses, may comprise):

This case is about the extent to which those last two categories of potential future receipt should be the subject of a ‘sharing claim’.

In relation to the co-investments the disagreement is two-fold:

The substantive dispute is therefore whether the wife should be entitled to share in the co-investments made since the separation.

At the date of the separation the husband had, held at MaisonBlau, a fund of €1.84m being part of what would otherwise have been his remuneration (and on which he had suffered income tax) being his retained future co-investment fund. The husband accepts that this should be shared equally with the wife and proposes that in addition to the lump sum of £ 5.3m he should pay to the wife:-

“a half share of any co-investments (when realised) in underlying investments existing at the date of the separation – in practice this means all co-investments in Funds A and B and the two remaining pre-separation co-investments in Fund C.”……..

He should not, he says, have to share with the wife either (i) co-investments made in the other four current underlying businesses in Fund C all of which long post-date the separation, or (ii) the balance now held at MaisonBlau for future co-investments all of which is ‘post-acquired’ or represents his half of the balance existing at the date of the separation.

On that basis the wife would therefore get the proceeds of:-

The husband would retain the proceeds of:-

The justification for the disparity, says the husband, is that it represents a part of the husband’s post-separation remuneration in which the wife is not, he submits, entitled to a share, and in particular there is no logic in allowing her to share in co-investments in companies acquired by MaisonBlau long after the breakdown of the marriage and to which she has made no conceivable contribution.

However the real issue is in relation to the sharing of any ‘carry’ received in the future.

The husband’s final proposal is that the wife should receive, on a Wells basis, 25% of the net carry that he will eventually receive from the remaining investments in Fund A, 20% of any carry from Fund B and 4% of any carry from Fund C.

Until receipt of the wife’s open proposal it had been understood by the husband that the wife’s case was to be that since the husband’s ‘entitlement’ to share in the carry arose once the commitments had been received from the investors at the inception of the fund and the fund ‘closed’ (with only the quantum of that entitlement in monetary terms to be determined by events thereafter) it was in the nature of an existing investment (by him) which may or may not produce a profit down the line. Consequently, it was said, if it does, she should share in it.

But in fact ‘carry’ vests over a period of time after the ‘first closing’ of the fund, and although it is accepted by the husband that both Fund A and Fund B were fully ‘vested’ during the marriage, Fund C had its first closing in October 2008 so by the time of the separation, in November 2010, 40% of the husband’s eventual entitlement to carry had vested. It has all vested now.

Up to a point the husband accepts that analysis (i.e. that the husband has an ‘existing investment’) in relation to Fund A where the carry hurdle had already been cleared during the marriage, and a current ‘value’ of the husband’s future entitlement to carry from the remaining investments can be quantified by reference to the current valuations. But in relation to both Funds B and C the possibility of any future carry is, according to the husband, entirely speculative, as the current value of the ‘carry’ is nil. However, in all cases, the husband is actively participating in the management of the funds so continuing to contribute to their value – if any.

Fund B while largely invested is very substantially short of clearing the hurdle.

Fund C is not even half invested yet (and was barely invested at all at the time of the separation). The suggestion that the husband has (or had at the time of the separation) an existing ‘investment’ in businesses not yet even identified, let alone acquired is, maintains the husband, far fetched to say the least.

In the end says the husband, this court is not concerned with some technical analysis of the nature of ‘carry’, but rather in a search for overarching fairness. Through the husband’s endeavours during the marriage he had created, by ordinary standards, a substantial fortune in the region of £33m (and to which he has already added considerably following the separation, so that there is now in the region of £40m). It may or may not be that his future endeavours will bring forth further fruit, and the issue is, he says, the extent to which any such future fruit will be consequential upon the joint endeavours of the parties during the marital partnership, and the extent to which it is the product of the husband’s post separation endeavours.

The husband accepts that it could be said that so far as Fund A is concerned it has a present value (which could be calculated by discounting from the present value to allow for delay in anticipated receipt) which is capable of being shared (even equally) with the wife, ignoring the fact that the husband will in practice continue to work to increase the value of the investments.

The husband further asserts that the application of that (conventional) approach would be that as there is presently no value to be attributed to the ‘carry’ in Funds B and C, and apart from the hypothesis that there will eventually be value generated (i.e. the product of post-separation endeavours by the husband and others), there is nothing for the wife to share.

However, the husband acknowledges that his future ‘carry’ might be characterised as something of a hybrid – partly product of endeavours during the marriage, partly product of endeavours post-separation and that therefore a hybrid approach to sharing may be appropriate.

His proposal is therefore that in respect of those investments (and co-investments) made during the marriage, prior to the separation in November 2010, it would be fair for the wife to share in (i) the value of the co-investments as they are realised, and (ii) the ‘carry’ (if any) eventually received in respect of the element of the work done during the period of the marriage.

What the husband is not prepared to agree to share is (i) co-investments or (ii) carry in respect of work undertaken since the separation and, in particular and most obviously, investments made since the separation or in the future.

The wife has now herself proposed a rather differently tapered approach to sharing in carry: she seeks 50% of carry from Fund A, 40% from Fund B and 25% from Fund C. She has not disclosed by what means she has arrived at those percentages – but it seems that she must be accepting, to some extent, that the husband is right when he points to ‘post-separation endeavour’ as a reason for her receiving less than an equal share.

In support of the wife’s position in relation to these issues her counsel have equally compelling points to make. I quote direct from their written argument:

“1.

In this situation the returns that are received:

a.

are a direct consequence of H’s being a partner in MaisonBlau;

b.

insofar as they are co-investments are nominally in the nature of capital gains;

c.

insofar as they are carried interests go hand-in-glove with the co-investments i.e. a partner will not get the first, the carried interest, without also making the second, the co-investment;

d.

are the product of both the investment of capital and endeavour over a number of years;

e.

require hard work by H (he being an active partner) and;

f.

are also the product of industry on the part of others (both partners and salaried employees).

This does not assist in their categorisation; but does illustrate their multifarious provenance.

I hope I have done justice to both side’s ingenious arguments. Huge efforts were expended on the husband’s side to demonstrate how much time and which periods of time were involved in the generation of these very valuable assets both before and after the parties’ separation. The arguments were reduced to a chart entitled “MaisonBlau Funds Timeline” which was the husband’s attempt to display graphically his arguments. It was, in my judgment, and on any view, a conscientious attempt to be fair to the wife as he saw it. Of course the wife refutes it because she says this is about more than merely analysing the problem temporally. The product of the husband’s efforts is from a continuum which stretches back into the marriage (especially if the important fundraising part of the process is fully included) and forward into the future. As I say dozens of pages of fascinating and at times somewhat abstruse evidence and written argument have been devoted to this aspect of the case. I have weighed it fully.

In the end on these MaisonBlau issues I have come to the following conclusions:

Although the parties are to be applauded for achieving agreement on many of the major issues and certainly cannot be criticised for the disagreement over the apportionment of the MaisonBlau funds, a mild rebuke is justified over their approach to the lesser assets. The small differences (as a proportion of the pot) in the value of the yacht, the approach to cars, the credit cards etc, etc does not merit the time (and costs) spent on them. As the rules now make clear, proportionality is the name of the game when costs are so high and court time is more and more at a premium. A much more rigorous approach to case management (especially in the field of the employment of experts) is being introduced in other areas of the family justice system to save precious time and money. This type of high value litigation cannot expect to be immune and parties to it can expect to be confronted more and more by a refusal by the court to participate in these disputes over the lesser assets and where in each case the difference is around 1% of the net value of the pot or less. Assets falling in this category should be bundled up together and an overall value for them all agreed. If not the court is itself likely to apply that system in a broad, even rough and ready, way. As Mr Marks QC observes the pursuit of precise accuracy is a spurious and vain endeavour where the figures are in most cases derived from professional valuations and opinion and assets are not being sold anyway.

Paragraph 54 above has been seen and approved by the President.

Adopting that approach here (especially as the husband has anyway made a generous concession over the value to be attributed to Falkirk) leads me to adopt his figure for Nibali and ignore the cars and credit cards.

I shall not tinker further with the precise arithmetic and the lump sum I shall award to the wife will be £5,400,000. The half share in the Ermine Street/MaisonBlau money will be paid over upon receipt by the husband as the wife has no pressing need of it over and above the lump sum, which is itself having to be borrowed.

There is every justification for the children continuing to benefit from the husband’s huge annual income even if the wife will not. £30,000 per child is therefore reasonable, to run until the children have ceased tertiary education. The extent to which part of that should be paid to each of them directly whilst at university is, I am sure, something the parties can and should agree at the time depending on the circumstances then existing but in the absence of agreement not less than 30% should be paid to the wife.

I hope this award fairly recognises the parties’ matched contributions, financial and non financial, to the family. That is my intention.

The parties have already made considerable strides in the drafting of what is a less than straightforward order. If there remain any drafting disputes I shall be happy to resolve them, if necessary, when they have been precisely identified.