Complex assets such as shares in private companies, private equity funds, or possessions of particular personal value can be some of the most difficult and fraught assets to value and divide in a divorce, according to 2019 eprivateclient Top Family Law Firm, Boodle Hatfield.

Harriet Errington, a senior associate in the family team at the firm, has explained how divorcing couples handle the disputes over these complex assets.

Assets with an emotional attachment can be a battleground and Ms Errington said that clients must be prepared to pay if you want to keep them.

“Jointly-owned assets with significant value or an emotional connection often prove to be a sticking point. There is a chance your ex-spouse will try to make it difficult for you to keep such assets as part of your financial settlement,” she said.

“Divorces are sometimes characterised by a desire to punish an ex, so if you have a particular emotional attachment to an asset, which your spouse is aware of, you may have to pay more than the market price to ensure you retain the asset after divorce.”

“A painting might be worth £10,000 on the open market, but if it is worth more than that to you, paying a little over the odds can stop it becoming an unnecessary obstacle to settlement.”

An ex may try to dispute valuations, especially if the assets are hard to value, Ms Errington warned. Whilst the value of many assets in a divorce are simple to assess – a car is worth about £20,000, and golf clubs are worth £1,000 as transactions involving comparable assets are easy to locate. However, Ms Errington explained, it is much harder to reach a valuation of something like a share in a Private Equity fund, a private company, or artwork.

“If the parties disagree on the value, the asset has to be valued independently, though this is not always straightforward," she explained. "The choice of valuer can itself be contentious; for example, each party may be suspicious that the other is pushing for a valuer who is more amendable to his/her position. Often the court will say one party should put forward three options and the other party may choose one from that list.

“Valuations may be disputed, with one party arguing that the value of an asset, such as shares in a family business, have declined. This often results in the valuer being cross-examined in court.”

Furthermore, Ms Errington advised that valuing some assets can be extremely expensive – and the valuation may eventually be proven to be inaccurate.

“As valuations of complex assets involve a lot of work from a skilled expert, they can be very expensive to get", she warned. "A valuation of a share in a complex, high-value and illiquid asset like shares in a private company can easily top £100,000.

“For very young companies, a valuation can also be subject to significant variations. For example, a 50% share in a pre-revenue fintech start-up is very difficult to put an accurate value on as there is little certainty as to the success of the business.”

If valuation has been agreed a further hurdle to consider is that investments in private equity and venture capital can be very slow and difficult to unwind.

Ms Errington said that as high net worth individuals and their family offices often invest in less liquid assets classes like private equity and venture capital and may make those investments directly into companies rather than through funds with legal commitments to keep capital in the funds for a set period. As a result those investments can be difficult to liquidate making them unattractive to the other spouse. Judges try to avoid making the settlement contingent on a sale of those assets and may seek to rebalance matters by ordering a transfer of the more liquid assets to the other spouse.

“Even if these PE and VC investments are made through a fund, it is also quite common for judges to order that the other party wait until the fund is wound up before they receive that part of the settlement,” she said.

Another potential pitfall is that a spouse may try to claim a share of an asset’s future growth as "some divorcing spouses may try to claim that while an asset might not be worth a great deal now, they should receive a share of what the business will be worth in the future. People often make that argument with shares in funds, or fast-growing businesses.”

However, Ms Errington said that such arguments do not often persuade a judge as businesses are almost always valued on what they are worth today; valuations cannot generally take into account future growth prospects.

"Judges," Ms Errington added, "generally strive to achieve a clean break between the parties so any growth in an asset post-divorce is retained by the spouse who owns it."

At the same time, however, a client may want to argue the opposite – that an asset is going to decline in value.

“Owners of certain assets may argue that their value is going to decline in the future," Ms Errington said. "This is particularly an issue for those who have income from royalties, like writers, musicians and actors, and people who hold patents and grant licences, such as those in the pharmaceutical or technology industries.

“While you can establish the past income from certain assets such as royalties, licences and patents relatively easily, this track record may not necessarily extend into the future in the same way. If the popularity of their work declines, or the patents they own fall out of use, they may see that income dwindle away. This could form part of their argument over the value of those assets.”

Ms Errington further explained that judges will try to avoid the sale of holdings in businesses. Most entrepreneurs’ biggest fear is that they will have to sell their business to find enough cash to settle their divorce, and while there is a risk of this, Ms Errington said that most judges will treat it as a last resort, and try to find other ways to reach an equitable division of assets.

"Judges are keenly aware of the repercussions in relation to business owners' own incomes going forward, not to mention associated risks to jobs and economic growth if they break up businesses unnecessarily,” she said.

“Some private businesses also have rules in place that can cause complications, such as only being able to sell shares to existing shareholders, or that a chief executive cannot retain their position if they sell down their holdings.”

If, however, a business has to be sold, the judge may decide to spread the payment over several years to avoid disruption, Ms Errington added.

“Even if it is necessary to sell a business in order to reach a financial settlement, it is common for judges to order that the resulting money be paid to an ex-spouse in a series of lumps sums over a period of years, rather than all at once. This can avoid disruption to the business and minimise losses,” she said.

“Paying an ex-spouse gradually means a business owner may avoid having to sell the business in a fire sale, and failing to realise its full value, something which cannot be to the benefit of either party.”

This article first appeared in eprivateclient on 16 September 2019.