S v S (Rev 2)

This is an application dated 13 February 2013 by Mrs S (“the wife”) for an order that the hearing which concluded on 13 July 2012 be resumed on the grounds of material non-disclosure by Mr S (“the husband”). The husband cross-applies for the wife to show cause why the Heads of Agreement entered into on 13 July 2012 and approved by me and then converted into a court order, again approved by me, should not be made an order of the court and sealed accordingly.

Pursuant to my order of 11 December 2012 the husband swore an affidavit on 31 January 2013 making two broad points namely (1) he was not guilty of non-disclosure and/or (2) the non-disclosure was not material. Having considered the husband’s affidavit the wife indicated that she intended to pursue her financial remedies and thus seek to persuade me that the Heads of Agreement/draft order were vitiated by material non-disclosure. Hence the hearing which took place before me on 15 April 2013.

The matter arises in this way. The parties married in 1993 and separated in 2010. They have 3 children, one of whom is T. The case which I heard between 9 and 13 July 2012 can fairly be described as a ‘big money’ case. The wife applied for financial remedies against the husband. I read the papers and heard the oral evidence of the wife and husband. The case was due to continue into the week beginning on 16 July but on Friday 13 July it settled after I had been asked not to sit on that day ostensibly to allow the parties to “narrow the issues”. As I remarked in my judgment of 11 December, in which I gave my reasons for deciding I was not “functus” and ordering the husband to file an affidavit, it did not take an enormous leap of judicial intellect to realise that the parties wanted to try to settle the case. They did. Terms of settlement were told to me, to which I gave my approval.

The settlement gave the wife circa £10.355m of cash and properties and the husband about £5.64m worth of cash and properties. The husband is the founder, and owns circa 63% of the issued share capital, of X Co with circa 29% owned by Bank A. In addition the husband agreed to pay the wife a deferred lump sum within 14 days of receipt by him of the cash proceeds of any disposal by him of any of his shares in X Co, having first deducted costs of sale and CGT, then £4m into T’s trust, then £1,714,286 to the wife absolutely, and 30% of the remaining balance to the wife. There were then agreed terms relating to transfer of properties and bank accounts, periodical payments for the children and the setting up of a trust for T. There was one area of disagreement which I resolved by email dated 24 July 2012.

By 25 July the terms of the draft order were agreed, which I approved. However, the draft order was never sealed. How that came about I recount in my judgment of 11 December 2012. I will not burden this judgment with reciting those facts, which I respectfully suggest should be read, should this matter go further.

Having decided that I was not ‘functus’ – the draft order never having been sealed – I next had to decide whether in the exercise of my discretion to order that the husband should file an affidavit. I was satisfied that for the reasons set out in my judgment the wife had demonstrated “exceptional circumstances” or “strong reasons” and thus made the order of 11 December 2012.

It must be remembered that, as at the date of my December judgment there was no evidence from the husband dealing with the alleged material non-disclosure. By my order of 25 September he was given an opportunity to file such an affidavit but I did not order him to do so. Thus, having found that, on the evidence I then had, prima facie the husband had failed to disclose material facts which could have affected or will materially affect the agreement I approved, and having posed the question “do the circumstances of this case justify the label of “exceptional circumstances” or “strong reasons” for ordering the husband to file an affidavit….?” I found that they did for the reasons I therein set out. It was only fair for the husband that he had the opportunity to file evidence before I proceeded to adjudicate whether he was, or was not, guilty of material non-disclosure.

At the hearing last July the broad thrust of the parties’ cases was as follows. There was no dispute about the 50/50 split of all the matrimonial assets. The real battleground related to the husband’s shareholding in X Co. The husband’s case was that he should retain all of his shares in X Co, that after the parties’ separation and in to the future the business assets were non-matrimonial in that he would be building them up until X Co was floated (i.e. IPO) or purchased outright and thus the wife should have no share in the ultimate proceeds. By contrast the wife’s case was that the husband’s shareholding in X Co was a matrimonial asset and that she should be entitled to 50% of the net proceeds upon disposal whenever that took place i.e. now or in the future even in 20 years time. The value of X Co was in dispute. The husband asserted that it was worth circa £50m and the wife asserted it was worth circa £75m. Thus on these figures the husband’s shareholding was worth either £31.5m or £47.25m, respectively.

However, as I understand it, those valuations, certainly by Mr D of KPMG on behalf of the wife, were given on the basis of X Co’s future maintainable earnings leading to an EBITDA valuation. It is plain from para 5.3.9 of Mr D’s report of 10 February 2012 that he had been told by X Co’s Chief Development Officer (CDO) that there was “currently no discussion regarding a public offering of X Co”.

When the matter came before me last July the effect of the husband’s written evidence was that an IPO, whilst theoretically possible at any stage, was most unlikely before the elapsing of 3, 5, or 7 years from July 2012, see in particular at paragraph 77 of the husband’s s.25 statement. In his evidence-in-chief this was repeated – see from page 22 line 11 right the way through to page 23 line 14, where he was asked by Mr Francis:-

“In your opinion is X Co in a state to be contemplating an IPO in short to medium term?

The husband answered:-

“We are doing everything we can to make ourselves – to give that as an option but an IPO is a very dangerous place to be. I think if we had been IPO’d today, if we had been floated today, we would have been ruined if I look at the business for the last quarter, the world would lose faith with you. So we are a long way from being ready for a flotation. You have to have a great market place, you need to have a very reliable business, and you need to be absolutely sure that you can predict where you are in terms of revenue, let alone other parts.”

I have no reason to alter my prima facie view expressed in my December judgment that the husband reiterated in his cross-examination the tenor of the evidence given in chief. At page 83 lines 17 et seq he said he would like to have an “exit” at the right time but he had no great desire for an exit “to-day”. At page 83 line 30 the cross-examination went as follows:-

“Q. I think you said very recently only in your June statement that doing the best you can, 5 to 7 years for an exit is perhaps the likeliest time frame. Is that right?

A. Well, I thought – if you ask me on different days what I think about an exit – I mean ultimately who knows? Who knows?

Q. Well only you do in this court better than anybody, so –

A.

Well, yes, I mean I have an opinion, and it really is a question of who knows. One thing is for sure – is that there’s nothing on the cards today, and I would suggest that 3 years seems like a nice time at one level, and it could easily extend to 5, on the basis that you don’t necessarily sell a company one day and get all the cash the following day, but at the moment I have no great appetite for anything.”

Mr Francis conceded, correctly, that “I have no great appetite for anything” must include an IPO. But he contended that “there’s nothing on the cards today” referred to an “exit” i.e. a disposal other than by an IPO. I reject that submission. Read with all his other evidence the extracts, both in chief and in cross- examination, must mean that the husband was telling me on oath that no IPO or any other exit was contemplated then, i.e. July 2012, or until at least 3 years hence or more likely 5 to 7 years.

In his affidavit of 31 January 2013 the husband exhibits documents running to no less than 684 pages. Mr Chamberlayne and Mr Mitchell in their skeleton argument in paragraph 4.2 demonstrate from these documents that planning for an IPO in a window between February and May 2013 began in January 2012 and was being actively pursued thereafter and in July 2012.

On 17 January 2012 X Co’s Chief Financial Officer (CFO) made a presentation to X Co’s Quarterly Management Summit entitled “IPO Planning”. In the husband’s affidavit of 31 January 2013 (paragraph 12) he suggests that this presentation was not just about an IPO but also to “sell it (i.e. X Co) or just grow it to the next level”. However, that document is exclusively about an IPO and there is no mention of selling it or growing it to the next level. At 9/671 is the detailed timetable leading to an IPO in April or May 2013.

Three days later on 20 January X Co’s CDO told Mr D that there was “currently no discussion regarding a public offering of X Co”. In my judgment that was grossly misleading. It is unnecessary to say whether he was deliberately lying. The husband must have known when he subsequently read Mr D’s report of 10 February 2012 that the CDO’s averment was, in the light of the meeting on 17 January, grossly misleading, but he did not correct it.

8/37 shows that the CFO and his team began to set up meetings with a long list of investment bankers.

At the end of April 2012 the CFO gave a second presentation headed “IPO Readiness, Project Status.” – see 9/672-684. He set out the potential investment banks to act in the IPO and that 11 were prepared to act. The timetable – known as a timeline – was brought forward to March/April 2013 and it said that it was possible for one to take place in the last quarter of 2012. “IPO Readiness” is considered at 9/684. Steady progress was being made and it ended with “we continue to stay on track”.

A month earlier, i.e. by 28 March, 19 July had been fixed for the “bake-off” i.e. when the shortlist of the investment bankers would meet with X Co to present their proposals to underwrite the IPO. This meeting was to take place in .....

8/98, 123, 128, indicate that during May 2012 X Co were communicating with potential investment bankers. Furthermore, 8/147 shows Bank A communicating with the CFO as at 3 July about setting up meetings with potential investors in relation to the IPO. 12 July was set for meetings with potential investors – 8/154. The meetings are called “non-deal roadshows”. 12 July was the very day the husband gave his evidence to me.

The presentation material for these roadshows was being prepared in June – see 8/175 in an email from Bank B to a number of X Co’s employees including X Co’s CFO and Chief Executive Officer.

On 20 June Bank A introduced to X Co’s CFO, Mr B as a potential “underwriter counsel” – 8/169.

In the first half of July X Co sent out an RFP (Request for Proposal) to each shortlisted investment bank for a meeting on 26 July with the objective of selecting “the bookrunner underwriters for an Initial Public Offering”. The RFP asked for X Co to receive their proposals by 24 July.

The husband, in his affidavit, says that the RFPs were sent out on 16 July. Mr Chamberlayne submitted that, if the husband is to be believed about this date, he must have known on 12 July, when giving his evidence, that the RFP was being prepared and that it was very shortly to be sent to the banks. I agree.

The RFP was very detailed – see 8/185 et seq. X Co’s CFO, the author of the document, at 8/185 set out the timetable which was to lead to an IPO on 22 February 2013. One of the very many matters the banks were asked to consider was the viability of the timetable – see 8/186.

At 8/208, 282, 349, 443, 506, and 563 are the proposals of Banks C, D, B, E, F, and A, respectively. It is plain from these documents that each believed that an IPO in early 2013 was entirely achievable. At 9/563, Bank A said:-

“We believe the high level timeline outlined by X Co is highly achievable and provides more than ample buffer to ensure X Co is positioned to execute an early 2013 offering.”

Why the bake-off date of 19 July was put back to 26 July is not explained. It may be because the husband, who wanted to, and did, attend the bake-off meeting, had it put back because 19 July was during week 2 of the final hearing. In any event it is common ground that the husband went to attend that meeting.

What happened thereafter I set out in my December judgment to which I refer. Broadly speaking the wife got wind of the husband’s visit k. Media reports in July and August – see 7/313 et seq – indicated that X Co had appointed 3 bankers to prepare an IPO for 2013 on NASDAQ. Figures valuing the company at between $750m and $1 billion were suggested i.e. £468m and £631m respectively.

The husband maintains that he did give full and frank disclosure and/or that the non-disclosure was not material. First he says that X Co was and is being prepared for all eventualities i.e. to build the business, a sale to a third party or an IPO. An IPO is merely one of the options. Second, 3 to 7 years to an exit remains the right estimate. An IPO is not the same as an exit route for the reasons set out in paragraph 3 (iii). Third, X Co’s growth record was and is not sufficient for an IPO to be mounted. Fourth, the IPO planning in 2012 was to incentivise X Co’s staff and to stir interest in the market place so that X Co could be a target for acquisition. Fifth, no IPO did take place in 2013 and none is planned for the future. Sixth, from March 2012 the husband doubted the merits of pushing an IPO. Seventh, several steps necessary for an IPO had not and still have not taken place – see paras 20 to 59. Eighth, the figures of $750m to £1 billion are “pure conjecture”.

I turn first to whether the husband complied with his duty of full and frank disclosure. It is absolutely plain to me that the husband’s evidence to me in July 2012, which I have set out, was seriously misleading. Whatever may have been the husband’s misgivings or doubts about an IPO the fact is that planning for an IPO in early 2013 was in full swing from January to August 2012. In any event, nowhere in the documents now disclosed is there any reference at all to the husband’s misgivings. I reject his argument that all the “planning” was to incentivise the staff and /or ginger up the market place. The depth and scale of the planning in 2012 hardly bears out his assertions. In 2012 the entire emphasis in the planning was exclusively for an IPO and not for any other ‘exit’ as he would describe it. In any event, it is not for the husband to pick and choose what documents to disclose and what to retain. As Thorpe LJ put it, giving his judgment of the Court of Appeal in Bokor-Ingram v Bokor-Ingram [2009] 2 FLR 922 at paragraphs 11 and 18, in particular the last sentences of each paragraph which I quote:-

“11…. Any information that is relevant to the outcome must be disclosed.”

“18…. The duty to disclose extends beyond what is certain on the date that the order is made to any fact relevant to the court’s review of the foreseeable future.”

In my judgment there is no doubt that as at July 2012 the wife, and hence the court, was aware that an IPO in relation to X Co was something that might take place in the future or there might be an outright sale or the company would not be sold. The husband sought to give the impression in his written and oral evidence that (a) an IPO was only one possible way his shares might eventually be realised, and (b) that any exit or IPO was 3 to 7 years away and (c) that as at July 2012 no planning was taking place for any IPO.

I am sorry to have to say that his evidence when placed against the documents which he has now disclosed can only be categorised as dishonest. Planning for an IPO was taking place, and for an IPO in early 2013 not 3 to 7 years away. An IPO was the only “exit” which in 2012 was being considered and planned. If the husband had been honest then he should have disclosed the documents exhibited in his affidavit and then sought to persuade me that no IPO was in fact going to take place. But instead very regrettably, he chose to suppress them. Why? The answer is obvious – because he did not want the wife or the court to know the true facts. He thus gave dishonest evidence, no doubt in the hope that this might lessen his exposure to the court’s discretionary powers.

I now turn to the issue of materiality. The reason why the courts have placed and continue to place such emphasis on the duty of parties to make full and frank disclosure is explained by Lord Brandon of Oakbrook in his speech in the House of Lords’ decision in Livesey (formerly Jenkins) v Jenkins [1985] FLR 813, the facts of which are so well known and which I will not repeat. It is that, unless the parties give full and frank disclosure of all material facts to each other and to the court, the court cannot “lawfully or properly exercise its discretion” in the manner ordained by s.25(1) of the Matrimonial Causes Act, 1973 – see pages 822 and 823. Section 25(1) requires the court to have regard to “all the circumstances of the case” including “(a)…. property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future”. Hence the observations of Thorpe LJ in Bokor-Ingram to which I have referred.

In my judgment had I known the facts which I now know it seems to me inconceivable that I would not have regarded them as relevant to the exercise of my discretion. It is true that, had the husband sought to downplay their significance as asserted in his affidavit of January 2013, I would have had to have made findings as to the probability of an IPO in early 2013 actually taking place. But the non- disclosure cannot be described as “some relatively trivial minor matter”, see the final paragraph of the speech of Lord Brandon at page 830. The husband in the instant case laid a false trail a) by his dishonest evidence and b) by his failure to disclose the documents exhibited to his affidavit of January 2013. Why lay a false trail, I ask rhetorically, if what is sought to be suppressed is immaterial? The very fact of a) dishonest evidence and/or b) suppression of documents must indicate some materiality as at July 2012.

Although Mr Francis conceded, correctly in my judgment, that the materiality of non-disclosure had to be judged at the time of the non-disclosure i.e. in July 2012, nevertheless he submitted – and this was the very core of his submissions – that, looking at all the facts, including what is now known i.e. that no IPO took place at all, and that, according to the husband’s affidavit of January 2013, there is no imminent prospect of an IPO, which was not challenged before me by way of any cross-examination of the husband, the court cannot now say that the absence of full and frank disclosure has led the court to make an order “which is substantially different from the order it would have made if such disclosure had taken place” per Lord Brandon in Livesey v Jenkins at p.830. He submitted that in the compromise agreement of 13 July 2012 the wife took a chance. During the course of the evidence I had suggested that a possible outcome could be that the wife could be awarded a tapering percentage of the net proceeds of disposal of the husband’s shares to reflect the fact that as the years went by so any “matrimonial asset” element in the husband’s shares would diminish. Thus, he submitted, the wife agreed to take the greater share of the liquid assets (properties and cash), to contribute to T’s trust far less than the husband, and to take a flat percentage of the net proceeds over an indefinite period of time. In other words the wife did not want to risk an outcome that might taper her award downwards as the years went on, possibly down to a small percentage.

Mr Chamberlayne sought to counter those submissions in a number of ways. He submitted that had the wife known in July 2012 what is now known she, in the words of Thorpe LJ in Bokor-Ingram, would have “raised her sights” – see paragraph 17 of his judgment. Mr Chamberlayne submitted that the key ingredient, from the wife’s point of view in July 2012, was how long was she likely to have to wait to get her “share” of the husband’s net proceeds of the disposal of his shares in X Co and how much her “share” might amount to. In making that assessment the wife, by the husband’s dishonest evidence and suppression of relevant documents and information, deprived her of the opportunity to make a fully informed decision whether to compromise or proceed with the hearing. Further, he said that it was inconceivable that in July 2012 there was no discussion within X Co and/or between X Co and the investment bankers about a ball-park figure of the value of X Co. Had he known the true facts he, Mr Chamberlayne, would have asked the husband in cross-examination “what is/may be the float price?” Even if, as the husband asserts, the whole idea of an IPO “went off the boil” i.e. was not proceeded with, the husband nevertheless in July 2012 deprived the wife of information critical to her assessment of whether to compromise and its terms or to fight on. Further, no reliance should be placed upon the husband’s evidence that no IPO was imminent, given his lack of credibility.

I was referred by counsel to a number of authorities in addition to Livesey and Bokor-Ingram, namely to Gordon (formally Stefanou) v Stefanou [2010] EWCA Civ 1601, [2011] 1 FLR 1582, Judge v Judge [2008] EWCA Civ 1458, and Walkden v Walkden [2009] EWCA Civ 627, [2007] 1 FLR 174, and C v C [2012] EWHC 3788 (Fam), in order to see what was the test of materiality and what had happened in specific instances of non-disclosure. Although I am grateful to counsel, none of the authorities improve upon, or row back from, or add to, the dicta of Lord Brandon in Livesey at p830 namely:-

“….it will only be in cases where the absence of full and frank disclosure has led the court to making, either in contested proceedings or by consent, an order which is substantially different from the order which it would have made if such disclosure had taken place that a case for setting aside can possibly be made good”

And that is the dicta that I must and do apply.

In the end whatever may have been the wife’s thinking in July 2012 it is what I did, i.e. approving the Heads of Agreement and the draft order, that must be looked at. If I had known the true facts relating to the IPO scheduled for early 2013 would I have made a substantially different order to what in fact I “ordered”? The scenario would likely to have been as follows. It would have been known that there was extensive planning for an IPO in early 2013, that the bake-off was set for 26 July and that the husband was going for that purpose. I would have likely rejected the husband’s evidence that the planning and the bake-off were merely to incentivise the staff and /or ginger up the market place and/or that the husband had misgivings or doubts. But I surely would have been bound to have asked myself “what is the likelihood of an IPO in early 2013 actually happening?” It is quite apparent from the documentation, particularly the RFP and the bankers’ proposals, that although much work had been done by July 2012, much work remained to be done. The investment banks had to be appointed, the terms of the underwriting agreed, the regulatory procedures with the authorities progressed and completed, to name but a few of the many hurdles that had to be overcome before any IPO could take place.

In such fluid circumstances I cannot see how I could have done anything else but to have progressed the hearing as far as I could and then adjourn to wait to see (i) whether an IPO in early 2013 did take place (ii) what were its terms (iii) what value did X Co float at (iv) what price per share was offered and taken up and (v) what were the terms of any lock-in in relation to when the husband (the founder, majority shareholder and driving force of X Co) could realise his shareholding and whether in one complete block or in parcels over a period of time. The merits of this course of action would have been to achieve as much certainty and eliminate as much speculation as possible. If an IPO had taken place the facts relating to it would be known and I could then have proceeded safely upon that basis.

If, by contrast, I had proceeded with the hearing and tried to divine the likelihood of an IPO taking place in early 2013, and all of its terms, I am confident that such an exercise would have been perilous, and would have run the risk of an order then being made upon a premise that could turn out to be false. i.e. that no IPO did in fact take place or that its terms were significantly different from what I might have divined them to be.

If therefore I had adjourned the proceedings in July 2012 to await developments, then it is plain that no IPO has taken place. Subsequent events have shown that whatever was going on in July 2012 and before in relation to an IPO in early 2013, did not result in any IPO.

But, says Mr Chamberlayne, the wife is entitled at a further hearing to challenge the husband’s assertion that no IPO is in contemplation and that I should not rely upon his affidavit evidence. The wife’s advisers could have, if they had so wished, cross-examined the husband on his affidavit but they chose not to do so. Furthermore, there is no evidence before me to contradict or undermine the husband’s evidence that no IPO is in contemplation or to use his words “no imminent prospect”. I am entitled to be cautious before I accept this part of his evidence, given his dishonesty last July. But I think I must accept it as I have no evidence before me upon which I can justifiably doubt it.

What do the Heads of Agreement of July 2012 translated into the draft unsealed order give the wife? First, she has by far the greater share of the liquid assets. Second, her contribution to T’s trust is far less than the husband’s. Third, the wife is entitled when the husband disposes of any of his shares to a further lump sum but much more importantly to 30% of the balance of the net proceeds as per paragraph 5 of the draft order. Thus, an enquiry as to the likely value of X Co and/or its shares is eliminated. Critically, the wife will receive her 30% whenever the husband realises his shares. The husband is now 52. The parties separated in September 2010, 2 ½ years ago. If he continues in X Co until he is 60 or 65 and then realises his shareholding it could be strongly argued that, whatever share the wife may have been entitled to in these shares as at either September 2010 or July 2012 (let me assume 50%), has been diluted to a considerable extent by the work the husband put into the company thereafter. The husband’s shares would become less and less of a matrimonial asset in the future. But the wife nevertheless is entitled to a flat rate of 30%. The wife took the risk that the crystallisation of her entitlement might occur sooner than 3 years by agreeing to a flat rate of 30%.

I thus conclude that any order which would have been made if proper disclosure had taken place would not have been substantially different from the heads of agreement incorporated into the draft, unsealed order which I approved. Accordingly, notwithstanding that the husband is guilty of non-disclosure, in all the circumstances I conclude that the non-disclosure was not material. Accordingly it follows that the wife’s application is dismissed and that I shall order that the draft order at 7/1 – 7 be sealed forthwith. The issue of costs will be dealt with after hand-down of this judgment.

I should not conclude this judgment without making further observations. The husband has fought the wife’s application to set aside tooth and nail. He declined my invitation in September 2012 to swear an affidavit and argued that I was ‘functus’ and that he should not have to swear any affidavit. The ‘functus’ argument was close to, if not actually, hopeless. He lost on whether he should file an affidavit. When he did swear his affidavit he maintained therein and in the hearing before me that he had not been guilty of non-disclosure. Mr Francis and Mr Allen were doing their duty to their client by putting his case. They had no other option. But it reflects badly on the husband that he must have instructed his counsel to argue the unarguable. This was again a hopeless stance and indicates on his part an attitude of defiance to his duty of full and frank disclosure. What he ought to have done was to recognise his non-disclosure, and its extent, but nevertheless argue that it was not material. That course of action would have avoided much cost and much time.