SK vTK

This is an application dated February 2012 by the Applicant, SK (hereafter “the Wife”) in Form A for the full range of financial remedies. The Respondent is TK (hereafter “the Husband”).

The Wife is aged 52. She was a nurse by profession. She had been a theatre sister before taking a job as a senior staff nurse in 1990. Since the birth of the younger child, she has been a housewife and mother.

The Husband is aged 49. In effect, he is a technology entrepreneur. From 1987, he worked in the technology sector for a company called Macmillan. Initially he wrote software but he then became involved in sales, proving to be very successful in that role.

The parties married in 1994. They have two teenage children. Both attend Public School as day pupils, although the combined fees, including extras, are in the region of £48,000 per annum.

Unfortunately, the parents’ marriage foundered in 2011. The Husband vacated the former matrimonial home Oakley House. He purchased a property nearby known as Beech House.

A petition for divorce was presented on 9th August 2011. A decree nisi was pronounced on 10th May 2012. It has not as yet been made absolute. It follows that this was a 17 year marriage, although I accept it should be extended by up to a year for the period of cohabitation prior to the marriage ceremony.

The Wife’s case is simple. She says that all the assets were accrued during the marriage. Each party has made an equal contribution, albeit in different ways. The assets should be divided equally on a clean break basis. She then says that the Husband has a significantly greater earning capacity than her. She argues that he should therefore pay the children’s school fees and University costs in full along with periodical payments of £20,000 per annum per child.

The Husband’s case is that the assets should be divided 60% in his favour and 40% to the Wife. He says that there are three reasons for departure from equality, namely special contribution, pre-acquired assets and the fact that by keeping the entire shareholding in his company, Limelight, he is taking on greater financial risk than the Wife who will retain largely risk free assets. In relation to school fees and University costs, he says they should share the cost in the proportions in which I divide the assets. Finally, it is his case that there should be no periodical payments order as the care of the children is shared equally between them. If I am against him in that regard, he argues that there should be an order based on the figure that would be produced by a Child Support Agency calculation.

In early 1992, the Husband decided he wanted to try to start his own business working in computer systems for the fledgling mobile telephone industry. He proposed doing so to two other employees of Macmillan, namely Terry Webb and Justin French. They agreed. The Husband prepared a business plan. Unfortunately, they had no external financing. Mr Webb therefore resigned from Macmillan to start the new business. It became known as Vision. Initially, Mr Webb worked for free. The other two each invested £10,000 capital and agreed that, if necessary, they would invest a further £5,000 each at a later date. In fact, this did not prove necessary.

Mr French continued to work for Macmillan. I am satisfied that the Husband felt uncomfortable about that given that the new business was, in effect, a rival to Macmillan. He had a good job offer from Macmillan Inc in the United States. Although originally part of the same company, it had become a separate entity following a sale of the parent company. He also thought he might be able to earn more with Macmillan Inc which could help him contribute further to the start-up costs of the new business should that prove necessary. The Husband therefore accepted the job offer and moved to the USA.

Vision was incorporated in 1992. On 24th December 1992, Mr Webb sent a letter to the Husband offering him an option to buy 1/3rd of the shares in Vision at par in January 1995. The letter says that, until then, the Husband would be, in effect, a sleeping shareholder. It ended by saying:-

“Although you may not directly make or influence decisions for Vision, we shall attempt to keep you informed of progress and be grateful for your input on occasions.”

In early 1993, Vision got its first customer. It appears that the job was offered to the UK arm of Macmillan but Macmillan was unable to undertake the work so Mr Webb did the work for Vision. Thereafter, the company gained a number of other blue chip customers rapidly and began to generate sales and profit. I do not have a copy of the full profit and loss accounts prior to 1996. I do have the abbreviated accounts for the earlier years. As at 31st December 1993, the company had net assets of £24,853 which had risen to £84,653 by the end of 1994.

In 1993, the Husband and Wife met in the United States. They formed a relationship. In November 1993, the Wife gave up her job in the UK and moved to the United States on a one year visa. Thereafter, they cohabited. I accept that their initial period of cohabitation was not without difficulty but, in any event, they became engaged in early 1994. From then onwards, it cannot be contested that they were in a settled relationship that moved seamlessly into the marriage in the autumn of 1994.

They returned to the UK for the marriage ceremony and subsequently rented accommodation in the North West of England. The Husband went to work for Vision on their return and acquired one-third of the shares by virtue of the earlier agreement. Mr French had also joined by this time. The company went from strength to strength. In particular, it developed a particular product with a company called Solar. Although the product itself did not generate a huge amount of money, it opened doors to a very large amount of business with Solar and other similar companies.

For the year ending 31st December 1996, the turnover of the company was £1,027,611. This generated profits before tax of £193,259. The turnover rose to £1,832,357 for the year ending 31st December 1997 with profit before tax of £336,194. During 1997, Mr French decided to retire. An agreement was reached for the acquisition of his shares which included further pension contributions and on-going salary. Overall, however, the consideration amounted to hundreds of thousands of pounds rather than millions.

This was, however, the time of the dot.com boom. The company began to get unsolicited approaches in which very large sums were offered to acquire the business. In 1997, they were offered £15 million by a firm called Wenden. On turnover of £1.8 million and profits before tax of £336,194, this was a remarkable sum of money. The following year, Moorhen offered £20 million as against turnover of £3.6 million and profit before tax of just over £1 million. It is clear that the value of the business had risen enormously in only a very short period of time.

The company was eventually sold in the spring of 2000 to Atlantic for £36 million, although this included shares in Atlantic and a significant “earn out” related to future profits. The sale was very timely as it was completed approximately one month before the dot.com bubble burst. The Husband had to continue working for the new business for several years. Eventually, he became Chief Executive Officer. The company continued to do well in much harsher financial circumstances. By the time he left the business in 2004, he had received total consideration for the sale of around £12 million gross, which was subject to CGT at 10%.

In 2004, the Husband formed his second business venture, namely a firm called Limelight. It operates in a very similar area to Vision. Again, it has undoubtedly been very successful. I will return to the exact measure of that success when I consider the question of the company’s valuation.

Limelight is different to Vision in certain respects. Although based in the UK, it has begun to concentrate on Eastern Europe. It is also beginning to establish a presence in the United States. I accept that it faces certain challenges in the immediate future but there is no dispute that it is a good solid business. Moreover, I remind myself that the Husband is very keen to retain his shares in it free of any interest in favour of the Wife. Again, I will return to this in due course.

The Husband holds 75.4% of the shares and therefore controls the company. There is no doubt, however, that he runs it with a Mr Frank Jennings. Recently, the Husband has, in effect, been the Chairman of Limelight with Mr Jennings as the Chief Executive.

On 28th August 2004, the Husband wrote to Mr Jennings in relation to the start-up of Limelight. The letter stated that the Husband would finance the working capital of Limelight by a loan of up to £250,000. Mr Jennings would work full-time but would not draw a salary for six months or until Limelight could afford to pay, whichever was the sooner. Mr Jennings was to receive an initial stake of 10% in Limelight which would increase to 25% subject to satisfactory performance. Indeed, Mr Jennings did subsequently receive this shareholding, although he has since sold a proportion of his shares.

At Paragraph 4, the letter said the following:-

“I will retain the remaining controlling stake in Limelight but undertake that we will share the proceeds of a sale of Limelight equally provided that…

(a)

All initial financing provided by me is repaid in full with interest (which has subsequently occurred);

(b)

Your contribution to the development of Limelight is equal to or greater than mine;

(c)

The proceeds of sale exceed £5 million.”

In August 2008, the family relocated to Switzerland for tax reasons. Their home here, Lewis Manor, was sold. The children initially went to school in Switzerland. It is clear that this move was not a success. The family returned to the UK in spring 2011 and purchased the former matrimonial home, Oakley House. In comparison to both Lewis Manor and their French property Chalet K, Oakley House was not an expensive property, now valued at only £900,000.

There is no doubt that the standard of living at the beginning of the marriage and for some years thereafter was relatively modest. The success and subsequent sale of Vision changed all that. In less than ten years, the family had gone from having no significant assets to being millionaires.

They progressed from living in rented accommodation when they moved back to England to buying a substantial property with extensive grounds known as Lewis Manor for £3.1 million in the autumn of 2003. Considerable additional sums of money were spent on its renovation, which necessitated the parties living in rented accommodation for two years.

In addition, they owned an equally substantial skiing chalet in the French Alps, Chalet K, which was purchased shortly after the original sale of Vision in summer 2000. It now has a gross value of some €10,500,000, although it is subject to a large mortgage.

Although I have to determine one particular issue as to the value of Limelight, it is agreed that the assets in the case are between £18 and £20 million net of tax.

In essence, there are five main issues that require determination:-

There are a few smaller subsidiary issues such as whether the payment of school fees should be shared and what, if anything, the Husband should pay by way of child periodical payments.

I have to apply section 25 of the Matrimonial Causes Act 1973. I must have regard to all the circumstances of the case, first consideration being given to the welfare while a minor of the children. I must have particular regard to the factors set out in section 25(2).

Following the decision of the House of Lords in White v White [2001] 1 AC 596, the obligation in all cases is to be fair. In so far as there is to be a departure from equality, there has to be good reason for so doing. This has become known as the sharing principle. It is rightly accepted that the sharing principle applies in this case.

I must guard against any possibility of discrimination between the parties on the basis of their different but equally valuable contributions. In particular, there must be no bias in favour of the money-earner and against the home-maker and child-carer.

The decision in Miller v Miller; McFarlane v McFarlane [2006] UKHL 24; [2006] 2 AC 618 makes it clear that the court must first calculate the appropriate sharing award taking into account any significant reasons for departure from equality. Thereafter, the court must calculate the applicant’s needs and decide whether or not there is any argument that the applicant is entitled to compensation for relationship generated disadvantage. Having undertaken these tasks, the court must set the award. In general, the award will be the greater of the three calculations but always bearing in mind the need to be fair to the respondent as well.

It is agreed that there is no question of compensation for relationship generated disadvantage in this case. Although there has been some consideration of the needs of the Wife, it seems to me to be quite clear that her sharing award will exceed her reasonable needs, however formulated. It therefore follows that the focus of my attention should be on sharing and, in particular, whether or not there is anything that justifies departure from equality.

There is no dispute that the case should be dealt with on the basis of a clean break. I do not therefore need to consider further section 25A.

I do however have to remind myself briefly of the law as to special contribution, pre-marital assets and the sharing of risk. I accept entirely that all three can, in an appropriate case, amount to a good reason for departure from equality. I do not propose therefore to consider the law at length as I have formed the clear view that my decision as to all three issues depends entirely on my findings of fact in these areas.

In relation to special contribution, I remind myself that cases in which fairness requires a departure from equality based on contributions during the marriage are exceptional and are as easily recognisable as departures from equality based on conduct (see Baroness Hale in Miller/McFarlane).

I accept that, if I find that the Husband did indeed bring something of value into the marriage, it may well amount to an unmatched contribution justifying a departure from equality. I also accept that, following the case of Jones v Jones [2011] EWCA Civ 41; [2011] 1 FLR 1723 there may be arguments available to the Husband on the basis of the springboard value of the company. It is, however, equally clear from Jones that an earning capacity at the date of the marriage is not an asset and should not be valued.

Finally, in relation to risk, I remind myself of the decision of the Court of Appeal in the case of Wells v Wells [2002] EWCA Civ 476; [2002] 2 FLR 97. The court found that the judge had erred in awarding the wife the bulk of those assets which were readily saleable at stable prices, leaving the husband with all those assets which were substantially more illiquid and risk laden. At Paragraph 24, Thorpe LJ said:-

“Having read the skeleton arguments and the judgment we were at once struck by the security of the result that the wife had achieved in contrast to the risks confronting the husband’s economy. The family’s standard of living has throughout been dependent upon the fortunes of the husband’s business. Had the marriage survived the family would undoubtedly have shared adversity as it had shared prosperity…”

I heard both parties give evidence. It is clear that there is no love lost between them. The Husband was, at times, quite dismissive of the Wife. He gave the impression that he regretted the marriage from the very beginning. It was obvious that the Wife found this very painful. It was a shame that he made such comments. Moreover, it entirely ignores the fact that they were together for some seventeen years and had two children of whom they are both very proud.

The Husband did accept in cross-examination that the Wife made a “great” contribution to the marriage and was a good wife and a good mother. I am sure he is right in that regard. I am quite satisfied that both these parties made a full and complete contribution to this marriage in their own spheres. If the various factors for departure that the Husband raises do not apply, it will be entirely right to divide the assets of this marriage equally.

I make it absolutely clear that I considered both parties to be witnesses of truth. Neither lied to me. Where there were differences between them, it was caused by a differing perception of events rather than anything else.

It is clear to me that the Husband is a very able businessman. He has a number of important skills that have enabled him to create two very successful businesses in the field of cutting edge technology. He has excellent computer skills. He is a very good salesman. He is clearly good administratively. He is able to lead a team and motivate his staff. He has deserved all his success.

Nevertheless, I am quite satisfied that, applying the authorities, this does not amount to a “special contribution” such as to amount to a good reason for departure from equality. It would not be accurate to describe him as a “genius”. Equally, whilst the extent of his business success is rare and something to be applauded, it cannot be said to be “exceptional”. I did not in any way get the impression that it was something that it would be inequitable for me to disregard.

I realise that the quantum of the fortune amassed by a businessman is only one feature. I am certainly not intending to lay down a rule that it is impossible to make a “special contribution” if the assets are below £20 million. It is however a factor that the Husband’s business success has not been so great as to generate truly vast wealth. He has been very successful. Whilst he is to be applauded for that, it is quite impossible to say that his contribution in this regard gets close to justifying a greater share of the wealth than that of the wife who contributed herself in an equally valuable way to the best of her ability.

There are two reasons why I find myself quite unable to accept the Husband’s case that his interest in Vision should be treated as a pre-marital contribution. First, I find that Vision had no significant value as at the date that the relationship of the parties became one of permanence. Second, the Husband had not, at that stage, made sufficient contribution to Vision to justify any such claim.

So far as valuation is concerned, the Husband has not produced a valuation of the company either at the date of the marriage or at the date of cohabitation. As late as 31st December 1993, the net assets of the company were as low as £24,853. I do not know the extent of the profits during the first year of trading as I have not seen the full profit and loss accounts. On any view, it was a fledgling business with great potential but it did not have significant value prior to the Husband joining the business on his return from America. I entirely accept that the period thereafter was a time when silly offers were made for such businesses but I am quite satisfied that no substantial offers would have been made for this business in 1993 or 1994. Indeed, none were.

Second, it is important to recognise that this Husband had not worked for this business at any point prior to the date of the marriage. His contribution had been to galvanise Mr Webb into action. He had done the business plan. He had not, however, won any customers himself. He had not performed any services for those customers. In fact, he had gone to America. He may have provided some advice but the impression I got was that this was pretty minimal prior to his return to the UK. As the agreement said, he was a sleeping partner. He had a right to join the business in the future and to acquire shares at par but he had not done so. I find it very difficult to see how this set of facts can amount to a pre-marital contribution. He cannot rely on a springboard because he had not yet arrived at the swimming pool let alone got onto the diving board. The hard work was yet to come.

The next issue relates to risk. The Husband says that he should receive a greater share of the assets because he is taking all the risk by retaining the shares in Limelight as part of his share of the assets. I accept that this can amount to a good reason for departure in a suitable case or at least justify a Wells sharing of the risk laden assets. Is it, however, a good argument in this case?

Mr Wagstaffe QC and Mr Allen, who appear on behalf of the Wife, say that it is not a good argument as the Wife is prepared, if necessary, to take a proportion of the shares in Limelight as part of her award. I do not accept her case in this regard. First, having heard her evidence, it is quite clear to me that she does not want a shareholding in Limelight. In her evidence in chief she told me that she would like a clean break. She said she did not want “any ties” with the Husband any more. It was only when pressed by Mr Wagstaffe that she said she would, if necessary, consider it and would be “comfortable” if the risk was shared. This is hardly a ringing endorsement of the proposal.

Indeed, I am quite satisfied that it is not the correct solution in this particular case. The Wife has never had any shareholding or involvement in the business. If she was to have a shareholding now, it would give rise to all sorts of extremely difficult issues in relation to matters such as the Husband’s salary, the company’s dividend policy, the approach to the issuing of further shares to employees and the future direction of the business. Would the Wife be entitled to representation on the Board? Would she ever see any value for her shares at all, particularly given that the company has no plans in the foreseeable future to sell to a third party? Any suggestion of further litigation in this regard, whether pursuant to the “oppressed minority” provisions or otherwise, cannot be in the interests of anyone. Neither the Husband nor the Wife wants this and it is not something the court should countenance.

Does this mean that the Husband’s case as to risk is a sound one? I have come to the conclusion that it does not. I take into account the following points:-

I have therefore come to the conclusion that this is a clear case for an equal division of the net assets. The parties had no assets of significance at the beginning of their relationship. All the assets have therefore been built up whilst they were together. Their contributions have been equal. Coleridge J said in H-J v H-J [2002] 1 FLR 415 that the significance attaching to a particular fraction or percentage was more than merely the monetary value it represented; it goes to the core of the parties’ understanding of fairness. Even though there would often have to be a departure from equality, once there was such a departure, one party would be left with a sense of grievance and of having been undervalued. This is just such a case.

It is therefore now necessary to turn to the quantification of the assets and then the calculation as to how the equal division should be achieved.

Before doing so, there is one further matter I need to address and that is the issue of Mr Jennings’ interest in Limelight. I have already outlined the terms of the letter sent by the Husband to Mr Jennings on 28th August 2004. Mr Wagstaffe on behalf of the Wife says that any agreement that is so vague or indefinite that the intention of the parties cannot be ascertained with a degree of certainty cannot be enforced as a matter of contract law. His case is that this agreement fails that test.

Mr Francis QC and Miss Heaton on behalf of the Husband submit that the courts have long been wary of too strict an application of the requirement for certainty in relation to agreements intended by the parties to have binding force, particularly where the parties have acted on the agreement.

I remind myself that Mr Jennings joined Limelight on a full-time basis as intended. The Husband gave him the 10% stake promised and subsequently increased it to 25%. The agreement only required him to do so if Mr Jennings’ performance had been satisfactory so it is easy to deduce that the Husband accepted that this condition was fulfilled.

I have heard both the Husband and Mr Jennings give evidence. The Husband was clear. He told me that Mr Jennings and he built this business together. He said that Mr Jennings’ contribution to the development of Limelight was equal to or greater than his own. He defined this as relating to the development of the revenues and profits of the business. He told me that Mr Jennings brought in all the customers. They were “in it together”. Mr Jennings worked as hard as he had done.

Mr Jennings’ evidence was very similar. He reminded me that the agreement was written at a time when the company hardly existed. The relationship between the two of them was built on trust. There was no need for lawyers. He confirmed that they both built the business up together. He said that if I was to ask all the senior managers in the company they would all say that his contribution was significantly higher than that of the Husband. He has been Managing Director. He has built sales and the organisation to support sales. He accepted that vision, strategy and forward thinking were all vital as were people management and generating sales. He said that, although all these measures are subjective, he considered his contribution to be outstanding however calculated.

Having heard both of them give evidence, I find that this was, at the very least, a full partnership between the two men to which both brought different but complementary skills. It cannot possibly be argued that Mr Jennings has not earned his half share of the proceeds of any sale. Moreover, I do not need to make any findings as to the exact contractual position as it is clear to me that the Husband will abide by the agreement. Given his evidence in this case on oath, it would be almost impossible for him not to do so.

I have already indicated that Mr Jennings has already sold a proportion of his shares. He currently holds 7.9%. Two other directors respectively hold 11.2% and 5.6% of the shares. The Husband holds 75.4% of the shares. The result of the agreement with Mr Jennings is to reduce that percentage. It is right to note that, initially, the calculation was done on an erroneous basis. I am satisfied that there was nothing sinister in that. The correct percentage, after equal division, is, in fact, 50.25%. There are then various share options but I do not need to trouble myself with them unless I find the value of the company to be in excess of £10 million.

A further issue was raised by the Accountants during the trial. It related to the treatment of the shares already sold by Mr Jennings. It was suggested that equality should be calculated on the basis of deducting the cash already received by Mr Jennings rather than by reference to the proportion of the shares he had already sold. If correct, this would have been unfair to the Husband as it would have penalised him for not having sold a similar proportion of his shares at the same time as Mr Jennings. It would however have reduced the value of his shares for this case. Quite properly, the Husband accepted that I should not proceed on this basis. I therefore say no more about it. The Husband’s share remains 50.25% although I do remind myself that, pending a sale, the agreement allows the Husband to receive 75.4% of any dividends. Moreover, the Husband was very clear that no sale is planned for the foreseeable future.

Mr Wagstaffe, however, says that, even if I conclude that Mr Jennings does indeed have a right to share the proceeds of any sale with the Husband, I should nevertheless make a contingent lump sum in favour of his client for her to receive one-half of any proceeds that the Husband eventually receives above 50.25%. He argues that such a solution is just saying that it does not prejudice the Husband in any way. He says that, if the Husband only receives 50.25%, there will be no liability to the Wife but, if he receives more than this, it would only be fair to the Wife to share the windfall.

I disagree. Although superficially attractive, there are many sound reasons why this is not a fair solution:-

I therefore reject the suggestion that there should be a contingent lump sum. The order will be a clean break order without any need for either party to consider further the position of the other going forward.

I now turn to the most difficult issue in the case. At the First Directions Appointment, a standard order was made by Robinson DJ that the parties “do jointly instruct Lesley Howe of Mall & Co to report on the value of the Respondent’s holding in Limelight Ltd.”

Lesley Howe reported on 28th September 2012. She valued the company at almost exactly £10 million. Working on the erroneous calculation as to the Husband’s shareholding allowing for Mr Jennings’ interest, she put the value of the Husband’s interest, net of CGT at just over £5 million.

The Husband was not happy with her report. He asked detailed questions to her more than once. He then sought permission to rely on his own expert forensic accountant, Sally Longworth of Grant Thornton. Almost inevitably, the Wife then sought permission for her own expert, Peter Smith of Quantis.

Ironically, this meant that an attempt to reduce the accountancy evidence to one expert rather than two has led to there being three experts. This is not the first time this has happened before me. As far as I can see, it has become almost the norm in contested litigation in the Family Division where there is an issue as to the value of a privately owned business. It has led me to wonder whether it is ever appropriate to have a Single Joint Expert accountant in a High Court case. I do accept that it would be wrong to dictate the position without regard to those High Court cases that settle on the basis of just one Single Joint Expert. I will therefore say no more about it at the moment. It may be that there should be some research into this issue. Moreover, I am making absolutely no criticism of orders for Single Joint Expert accountants in non-High Court cases where such an order is not only sensible but absolutely essential to save costs. Equally, Single Joint Expert property valuations are always required, regardless of the value of the property concerned.

The nature of the dispute between the three accountants does, however, entirely put the lie to the suggestion made throughout the case by Mr Francis in particular but also by Mr Wagstaffe that it was only the approach of the other that led them to contest the valuation so strenuously. Both parties, and particularly the Husband, contested the valuation almost to the last pound. It has been said many times that the valuation of a privately owned trading company is an art not a science. Yet I have been asked to assess the value of this company with great precision by both sides.

Quite properly, all three accountants revised their position as the case progressed. They then produced a schedule of agreements and disagreements in tabular form in small font running to 15 pages. The Single Joint Expert, Lesley Howe’s final position was that the company had a gross value between £10.5 million and £12.2 million. Peter Smith, for the Wife, gave a range of values from £9.39 million to £11.04 million. Sally Longworth, for the Husband, valued Limelight at £8.277 million.

There has been reference during the proceedings to a number of different ways of valuing the company. These include a formula to calculate the value of the shares of a director, Nigel Shelly which produces a figure of £11,325,960. It has to be said, however, that this calculation is based on a very crude multiple of sales that was not the approach of any of the experts.

There were two other valuations produced by the auditors, Cope & Wells. These were done for the purposes of issuing B shares to employees and to satisfy HMRC that these shares had been correctly issued for tax purposes. Mr Wagstaffe was extremely critical of different approaches in the two valuations, arguing that the Husband had improperly influenced the auditors to obtain a forensic advantage in this case. I reject that submission. First, I do not find that the Husband did so. I accept that he made various points to Cope & Wells but I am satisfied that this was because he thought their initial approach was wrong rather than with this case in mind. Second, I have to decide this case on the evidence before me. I have to resolve the issues raised by the three accountants who gave evidence to me. Cope & Wells did not give evidence. Once I have decided the issues, it will be clear which of the two Cope & Wells valuations is more accurate. I am therefore clear that these valuations are largely irrelevant to my enquiry.

Mr Wagstaffe made one further point. He submitted that it was relevant that all the valuations apart from Sally Longworth and the second Cope & Wells report were remarkably similar and that this was itself indicative that they were correct and Mrs Longworth was in error. Again, I do not agree. I have to decide each issue between the accountants on its merits. Once I have done so, a valuation will emerge.

The year end for the accounts of Limelight is 31st December of each year. In the past five years, the figures for Limelight have been as follows:-

The figures for 2012 are based on management accounts. It should also be noted that the figure for UK sales has remained pretty constant over the past five years. It is the figure for overseas sales that has grown substantially. In 2008, overseas sales amounted to £3,182,797. The figure had grown to over £7 million by 2011.

The forecast for 2013 shows a sharp reduction in both turnover and profits. The forecast figure for turnover was down to just under £8 million and the profit to just under £190,000. I was told in evidence that the forecasts had not proved very accurate in previous years. The alleged downturn was, however, confirmed to me in oral evidence by Mr Jennings. He gave me detailed evidence of significant reductions in orders and work going forward although he did say that the first quarter of 2013 would be pretty similar to the last quarter of 2012.

Mr Wagstaffe was given no notice of the detailed evidence given by Mr Jennings in this area. Whilst I have no reason to doubt the evidence, I do take the view that, as one door closes, another opens. Moreover, the Husband’s case is firmly that he wishes to retain the shareholding in Limelight free of any claim by the Wife. This does not suggest that he is concerned that the company is about to fail or to face significant long term problems. I accept that, in so far as it is correct to factor these difficulties into a valuation, the right way to do so is by reducing the multiplier applied to the level of sustainable profit.

Finally, the company has historically paid dividends whenever it is able to do so. This means that the net assets are not a significant feature of the valuation exercise. Indeed at the end of 2011, the net assets were only £372,420. It should however be noted that this figure is after deduction as a liability of a significant director’s loan account in favour of the Husband. At the time, he was owed £1,335,406, although the loan has since reduced very substantially to £214,491. This loan is, of course, an asset in the case over and above the company valuation.

Broadly speaking, all three Accountants accept that the correct way to value Limelight is on the basis of an earnings based calculation based on a multiple of profits.

There are, in essence, five issues between them:-

I have already reminded myself that such valuations are an art not a science. I heard very detailed evidence on all these issues for just over a day. All three experts are very experienced and well qualified. They have merely exercised their individual judgment in slightly different ways. I do not wish it to be thought that I have not given careful consideration to the detailed evidence they gave. I am, however, clear that I should come to a broad assessment on each issue.

I have formed the clear conclusion that foreign exchange gains and losses should not be excluded. The company does a significant amount of work in the Eurozone, Eastern Europe and the United States of America. Foreign exchange gains and losses are therefore an inevitable feature of the trading. Any purchaser will have to take them into account. The only safe way of doing so is by reference to the actual gains and losses as shown in the accounts. By the conclusion of cross-examination, I formed the view that all three experts were pretty close to agreeing that this was the correct way to perform the calculation.

It is a common feature of such valuation exercises to add-back excessive directors’ remuneration. A purchaser will take account of the amount considered reasonable to run the business after it has been acquired. Any excess over and above this figure actually paid to the directors is therefore additional profit that the directors have merely drawn out in remuneration. It should be added back to calculate true profit.

I have to say that my initial reaction was to take the view that there was excessive directors’ remuneration in this case. I based this conclusion on some figures given by Lesley Howe in answer to questions from the Husband as to the median figures for AIM companies. It is also a feature of this case that both Mr Jennings and the Husband have been attempting to take a less active role in the business. Indeed, the Husband told me that he was working less than 10 hours per week now. This is really equivalent to a non-Executive Chairman although I entirely accept that his knowledge of the business will make his input more valuable than a Chairman who has never worked for the company. Equally, Mr Jennings has recently reduced his hours to around 30 per week. Any add-back for him must, however, take account of the fact that his earnings include notional commission for the sales he has, until recently, generated.

The difficulty in relation to any add-back argument is that Mr Francis managed to get both Lesley Howe and Peter Smith to admit in cross-examination that a reasonable figure for director’s remuneration in this company was £1 million per annum. He submitted, with some force, that I was bound by their answers.

I have, with some hesitation, come to the conclusion that I should not add-back excessive directors’ remuneration. In this regard, I have additionally considered that any purchaser might well expect to include a significant element of earn out in a valuation. In other words, both Mr Jennings and the Husband may have to continue to work in the business after sale for a period of time. Indeed, this is exactly what happened when the Husband sold Vision. Earn-out has not been factored into the valuation exercise. In so far as there is any excess directors’ remuneration, it is, in my view, balanced by this point in relation to earn-out.

This conclusion does, of course, mean that the Husband’s current remuneration is not included in the valuation exercise. For 2011, this was some £325,000 gross but it has since reduced to £225,000 gross or £124,000 net. I propose to use this latter figure. Its importance is that the Husband has this earning capacity over and above the value of the assets in the case because this income has not been used to calculate the value of those assets.

The third dispute relates to whether or not the calculation of maintainable earnings should use the normal rate of Corporation Tax (24% at the relevant time) or be reduced to 12% to take account of the fact that, at present, the Government has allowed double tax relief for research and development.

Although there is no doubt that the company has taken advantage of this in the past, a significant number of reasons are advanced for not allowing it in full when calculating maintainable earnings:-

I agree that, for these reasons, a purchaser would not apply a temporary reduction in tax to the whole multiple. Sally Longworth for the Husband accepted that the matter could not be ignored altogether. She proposed adding a notional sum of £217,000 to her valuation calculated on the basis of around two to three years’ tax savings and using a discount rate of 20%. In my view, this is as good a way of doing the calculation as any. I accept it.

It is usual in reaching the figure for maintainable earnings to apply a weighting to recent years’ earnings. In general, the more recent the year, the higher the rating. A rating of 1, 2, 3 for the last three years is not uncommon.

The arguments in this case are two fold. First, should 2009 be included? I have decided that it is too long ago and have not therefore done so. Second, what weighting should be given to the Management Accounts for 2012? The issue relates to how accurate the accounts are likely to be. I heard evidence that, in past years, the management accounts had been very accurate. At worst, they were 3% out. This would only amount to a maximum of £41,550 on the figures. I am therefore satisfied that the figures are sufficiently accurate to be relied on fully for the purposes of the valuation exercise.

Finally, I remind myself that 2011 was an exceptional year. It would be odd to use a multiple higher than any year other than the best ever, namely 2011, when the most recent year shows a significant drop in profits. A purchaser is bound to want to pay close attention to what has happened recently. I therefore conclude that the correct route is to give a weighting of 1 to 2010; 2 to 2011 and 3 to 2012.

By the time of the final hearing, the difference between the experts as to the correct multiple to use was quite narrow. Sally Longworth suggested a multiple of 6.5; Peter Smith favoured 7.2 and Lesley Howe said 7.5.

There was not much oral evidence on this topic. At an early stage of the proceedings, the PCPI index of general company sales was used to calculate the correct multiple. By the time of the hearing, it was agreed that I should use instead information relating to three quoted comparable companies, Atlantic (which had bought Vision), and two further companies. All three were much larger than Limelight. The average P/E multiple for these companies is 9.59.

There then has to be a discount for lack of marketability with a possible uplift for control. Although the experts disagreed as to whether the discount should be 22%, 25% or 33%, they agreed that it was really a matter of feel and judgment. In this regard, I prefer marginally the approach of Mr Smith. He favoured a reduction of 40% for lack of marketability but an uplift of 15% for control, making a net reduction of 25%. This gives a multiple of 7.2. I am going to round this figure down to 7. It follows that I have decided that the correct multiple to use is 7.

I therefore arrive at the following calculation for the valuation of the company:-

As the overall valuation is less than £10 million, I can ignore the value of the B shares. I realise that this leads to a relatively conservative valuation for Limelight. Looking at the case in the round, I take the view that this is correct given the budgeted deterioration in profit in 2013 and the evidence of Mr Jennings. If I was to require any additional support for this approach, I find it from the fact that I have rejected the Husband’s case as to risk. He will take the full value of the company as part of his half share but on the basis that I have given a relatively conservative valuation to it.

I now turn briefly to consider the assets overall. There is virtually nothing between the parties in every respect other than the value of Limelight. I propose to use the schedule produced by Mr Francis in closing but on the basis that my valuation of Limelight is substituted for his figure. The amended schedule is to form appendix A to this judgment.

In summary, the net figures are as follows:-

I have already indicated that there should be an equal division of the assets on a clean break basis. An equal division amounts to £9,068,043. There is agreement as to how that division should be achieved. The Wife will receive:-

On this basis, she will be £4,297,382 short. It is further agreed that there should be a pension share to bring about pension parity. This will give her a further £329,642 including her own small pension. She therefore requires a further lump sum of £3,967,740 from the Husband to achieve parity on a clean break basis. I have already indicated that this will be more than enough to provide for her reasonable needs assessed on a generous basis.

The Husband will also have assets of £9,068,043 of which £4,023,000 is the valuation of Limelight. As he will retain other assets worth just over £5 million. He will undoubtedly also have sufficient to provide for his reasonable needs. I therefore conclude that he can afford the lump sum I propose.

I have divided the assets equally. It therefore seems to me to follow that the parents should share the costs of the children’s school fees and University fees equally. I so order. I make it clear that this does not include the children’s expenditure whilst at University to which different considerations apply.

Although there is a shared care arrangement, I consider there should be a general periodical payments order for the children payable by the Husband to the Wife. He has an additional earning capacity of £124,000 per annum net that has not been taken into account in the valuation of Limelight. The parties have both asked me to deal with this aspect and I note that his income is above the Child Support Agency “maximum”. I am equally satisfied that the Wife’s earning capacity is not significant. Indeed, it was not suggested that it was.

Mr Francis has reminded me of the CSA approach. If I was to take 20% of the Husband’s net income, the figure is £24,800. He then says that I should divide this by two to reflect the shared care, which would be £12,400 per annum or £6,200 per child.

I have thought about this carefully. I do not consider that is sufficient given the overall dynamics of the case. I find that an appropriate level of maintenance is £10,000 per annum per child. This still gives the Husband a net income of over £100,000 per annum that has not been taken into account in the value of Limelight, as well as an additional 25% of any Limelight dividends pending sale.

It is right that the Wife’s budget for the children in her Form E is only £10,320 per annum. This is not, however, a fair presentation. This figure does not include any “roofing allowance” (ie the cost of providing them with a home), any food expenditure, entertainment or holidays.

When the children proceed to Higher Education, I estimate their individual costs of living (to include their accommodation) will be between £12,000 and £15,000 per annum per child. If the Husband is prepared to undertake to be responsible for those costs in full, the periodical payments order will terminate when they conclude secondary education. If he is not prepared to undertake to do so, the costs will be shared equally between the parents and the periodical payments order will reduce to £6,750 per annum per child.

I have not heard argument as to costs. There is of course a presumption of no order as to costs in a financial remedies case. I have taken the costs into account in my calculations. Both parties have succeeded on some issues and failed on others. My provisional view is that there should be no order as to costs.