Business assets on divorce or dissolution: how does the court approach the pre-marital elements of a business?

Upon divorce, many business owners are often eager to protect and ringfence their business where possible. Although it can often be difficult to easily extract funds from a business, it remains an asset which is available for the court to divide between the parties. 

This is often complicated, as the business may have been established before the marriage, inherited by one party, or have grown significantly following separation due to one party’s efforts. Learn about the scope of business assets in financial settlements. 

Pre-marital elements of a business

In the case of White v White [2000] UKHL 54, it was recognised that there is a case for saying a party should be allowed to keep, (and, consequently, the other party may not be entitled to share in), their non-matrimonial property brought into the marriage or inherited or gifted to them during the marriage. 

Needs: this will carry little weight if the financial needs of both parties cannot be met without utilising such an asset. It is clear, therefore, that the needs of the parties will continue to take precedence.  This approach was endorsed in J v J (financial orders: wife’s long term needs) [2011] 2 FLR 280 when Moylan J declined to exclude the husband’s non-matrimonial property, (a business set up by his grandfather), as it was needed to meet the wife’s needs.

The treatment of matrimonial and non-matrimonial property in a non-needs based case

In the event that the non-matrimonial property is not needed to meet the other party’s needs, the court is then faced with the difficult question of how to approach the treatment of matrimonial and non-matrimonial property. Case law has developed two broad approaches as set out below.

1. Formulaic approach

This approach involves dividing all the assets into two parts, matrimonial assets and non-matrimonial assets, (such as the pre-marital element of a business). 

The matrimonial assets are then shared and so divided equally between the parties, unless needs or compensation arguments dictate otherwise.

In N v F (financial orders: pre-acquired wealth) [2011] EWHC 586 (Fam), the process was set out as follows:

1. The court should decide whether the existence of pre-marital property should be reflected at all. This will depend on issues such as the duration of the marriage and whether the non-matrimonial property has been intermingled with the matrimonial assets, (for example, if an inheritance has been used to purchase property which the parties have benefitted from).
2. If the court does decide that reflecting pre-marital property is fair and just, the court then must decide how much of the pre-marital property should be excluded from the matrimonial pot. The court will consider whether it should be:
   • The actual historic sum of what the asset was worth at the time of the marriage;
   • Less than the historic sum if there has been a lot of intermingling; or
   • More than the historic sum to reflect the latent potential in the business.
3. The remaining amount of matrimonial property should then normally be divided equally between the parties.
4. The fairness of the award should then be tested by calculating the overall percentage each party is to retain, (including the non-matrimonial assets).

2. Telescoped approach

The telescoped approach is less detailed than the formulaic approach and is a more broadbrush method. With this approach, the court should consider the value of all the assets, including non-matrimonial assets, and adjust the award from 50/50 on a discretionary basis to reflect the existence of non-matrimonial property. Under this approach, the court does not need to separate out non-matrimonial property or determine the precise value of it.

In Versteegh v Versteegh [2018] EWCA Civ 1050, King LJ concluded that the court may choose whichever approach suited the degree of particularity or generality required on the facts of the case. 

The issue of pre-marital elements of a business, which then continued to grow during the marriage, was examined in the landmark case of WM v HM [2017] and the subsequent appeal (Martin v Martin [2018]).

Martin v Martin

The main asset in this case was a private limited company which Mr Martin set up with his friend prior to living with Mrs Martin. When the parties later married, Mr Martin bought-out his friend’s interest and gifted Mrs Martin 1% of the company shares. The judge was tasked with determining how much of the business’ current value related to the pre-marital element and should be ringfenced as non-matrimonial. 

The judge took a straight-line apportionment approach when valuing the company. This approach plots the value of the company at the date of incorporation on one end of the graph and the value of the company at the date of the final hearing on the other, drawing a straight line between the two.  The judge decided that 20% of the current value was non-marital property accumulated prior to the marriage. 

Mr Martin argued that he had made a special contribution to the marriage by way of building up the business and, therefore, there should be a departure from equality of the matrimonial assets in his favour. This argument was rejected, as special contribution arguments are limited to rare cases and in this case the criteria were not met. 

The judge ultimately split the remaining matrimonial assets of £145million equally between the parties. In applying the final stage of the formulaic approach referenced above, the award ultimately gave Mrs Martin 40% of the overall assets which was considered to be a fair outcome.

Both parties appealed the judgment. 

Mrs Martin appealed against the determination as to what was non-matrimonial. Mr Martin cross-appealed against the judge’s finding that the company had a gross value of £221 million. For the purpose of this article, we will focus on Mrs Martin’s appeal.

Mrs Martin’s appeal: non-matrimonial assets

It was held that the manner in which a court determines whether an asset is matrimonial or not is partly evaluative and partly discretionary. The judge had been entitled to adopt a straight line apportionment approach when determining the value of the pre-marital element of the business as there is “no single route to determining what assets are marital.” 

The true essence of the guidance given is that the court must make fair overall allowance for a party’s non-matrimonial property, which the award did, taking into account Mr Martin’s efforts prior to the marriage and also meeting Mrs Martin’s needs upon the breakdown of the marriage.  Mrs Martin’s appeal therefore failed.

Mr Martin’s appeal: valuation

Mr Martin succeeded with his appeal — it was held that the judge had failed to consider if the proposed award achieved a fair division of the copper-bottom assets, (such as property or savings), and the illiquid and risk laden assets, (such as the business). 

The valuation of private companies can be fragile and has to be treated with caution. 

In light of this, Mr Martin was provided with additional time in which to make the lump sum payment. Learn more about valuing a business in financial proceedings.

Ultimately, the case law is clear that judges retain a lot of discretion in not only determining what assets, or percentage of an asset, is non-matrimonial but also how that should then be considered within any settlement. 

If you are looking to ringfence any pre-marital business assets, pre and post nuptial agreements can be a powerful tool in limiting claims on divorce or dissolution.