Where there’s a Wells there’s a Way

Published: 01/07/2024 07:00

The 2018 Court of Appeal judgments in Versteegh v Versteegh [2018] EWCA Civ 1050 and Martin v Martin [2018] EWCA Civ 2866 appeared to signal that Wells sharing was falling out of favour. More recently, however, judges seem more open to it, perhaps reflecting the economic turbulence of recent years. Consideration of Wells sharing in several significant judgments in 20231 (the year Wells turned 21) suggests this as an opportune moment to reflect on current law.

As is well known, Wells sharing derives from Thorpe LJ’s judgment in Wells v Wells [2002] EWCA Civ 476 where he identified that continued co-ownership of assets (in that case a shareholding) may help achieve the court’s objective of fairness. The tension, of course, is with the clean break principle in s 25A MCA 1973 under which the court must consider whether it is possible to end the parties’ financial obligations towards each other. The courts have thus sought to navigate this tension and identify when fairness requires the clean break principle to make way for Wells sharing.

When will Wells sharing be considered?

Often, the asset-holder will resist Wells sharing, preferring to retain the future fruits of their asset and avoid the other party’s ongoing involvement in their affairs, but this will not always be the case: if the asset is in difficulty, or raising funds to buy the other out would be difficult, they may prefer a Wells approach.

There are broadly three circumstances when Wells sharing will be considered.

The asset cannot be reliably valued

This was the situation in Wells. Mr Wells’ previously successful business had declined, rendering it unsellable and thus impossible to value. Wilson J (as he then was) awarded W most of the liquid assets whilst H retained the business. Thorpe LJ, giving the lead judgment on appeal, held:

‘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 … sharing is achieved by a fair division of both the copper-bottomed assets and the illiquid and risk laden assets.’

Whilst Thorpe LJ considered that sharing H’s business would have produced a fair result, neither party wanted this. Thorpe LJ accepted that as an appeal judge he could not impose it and so increased H’s share of the liquid assets. However, in subsequent cases judges have ordered in specie division where business valuation posed a challenge, with Charles J in D v D & Anor [2007] EWHC 278 (Fam) describing private companies as a ‘classic example’ of the type of asset where the uncertainty of valuations may render a clean break unfair. In Versteegh the Court of Appeal found the trial judge had been justified in concluding that he could not make even a conservative estimate of the value of H’s business and Wells sharing was appropriate. In CG v DL [2023] EWFC 82 where, as in Wells, a previously successful business was in decline such that it was unsellable and thus could not be valued, Sir Jonathan Cohen took a Wells approach. However, not every private company is difficult to value. In Cooper-Hohn v Hohn [2014] EWHC 4122 (Fam), Roberts J found that as H’s business has no value beyond its underlying assets its value was clear and W’s claim for Wells sharing failed. Generally, the value of a business will fall somewhere between ‘clear’ and ‘unknowable’; where along the spectrum it lies will be relevant to whether Wells sharing is appropriate (discussed below).

Where the court’s inability to value a business is due to non-disclosure, Wells sharing is unlikely, not least due to probable challenges with enforcement. Rather, adverse inferences may be drawn and the other party awarded more liquid assets (as in AP v ALP [2018] EWHC 2758 (Fam) and Ditchfield v Ditchfield [2023] EWHC 2303 (Fam)).

Deferred assets whose future value depends on currently unknowable information also pose valuation challenges. Carried interest is a classic example: private equity fund managers receive a percentage of the profits generated for investors if the profits exceed a ‘hurdle rate’, typically 8%. If it is not met the carried interest has no value; if it is, receipts depend on the return on each underlying investment. Wells sharing was applied to carried interest in B v B [2013] EWHC 1232 (Fam), A v M [2021] EWFC 89 and ES v SS [2023] EWFC 177.2 It was also the approach adopted in B v B [2015] EWHC 210 (Fam), where H’s non-transferrable shares in a venture capital company were likely to realise significantly more than their current value, and in GW v RW [2003] EWHC 611 (Fam) where H held deferred stock and options.

Insufficient liquidity

Where a business’ value can be satisfactorily assessed, but there are insufficient other resources to achieve a fair division without dividing the business, the main options are Wells sharing or a deferred lump sum (or a sale of the business, which is rarely desirable). The preferred approach will depend on the circumstances: in Versteegh, Wells sharing was preferred as raising liquidity would harm the business; in X v X [2016] EWHC 1995 (Fam), Bodey J described deferred lump sums as the ‘tidier’ option, and took that route given H’s ability to raise funds within 12–18 months. In Martin v Martin [2018] EWCA Civ 2866 the approaches were combined, with W awarded both a deferred lump sum and shares.

A genuinely joint asset such that fairness suggests both parties should retain an interest

In some cases, even where neither valuation nor liquidity poses a problem, fairness may require a Wells approach. For example, in C v C [2003] EWHC 1222 (Fam), the parties had jointly set up a pharmaceutical company which would likely sell within the next 5 years for significantly more than its current value. Whilst H had been its driving force, W had been actively involved and wished to remain so, and Coleridge J considered fairness required that she be able to do so – albeit that she was awarded a smaller shareholding than H. By contrast, in AP v ALP [2018] EWHC 2758 (Fam), W’s lack of involvement with H’s (uncertain) business ventures weighed against Wells sharing being a fair outcome.

The importance of the clean break

Where any of the above circumstances arise, the need to do fairness will be balanced against the desirability of a clean break. Lord Scarman’s ‘classic justification’3 for a clean break in Minton v Minton [1979] AC 593 was ‘the public interest that spouses, to the extent that their means permit, should provide for themselves’ and to encourage former spouses ‘to avoid bitterness … and to settle their money and property problems … to put the past behind them’. However, where there is to be no clean break in any event, this will be a less significant factor in determining whether Wells sharing is appropriate (see e.g. B v B [2015] EWHC 210 (Fam)).

The weight to be given to the desirability of a clean break has waxed and waned, a trajectory which can be neatly traced in the judgments of Sir Nicholas Mostyn. One year after Wells, he suggested in GW v RW that Wells sharing ‘should become standard fare where a case has a significant element of deferred or risk-laden assets. For why should one party receive most of the plums leaving the other with most of the duff?’. Some years later in BJ v MJ (Financial Remedy: Overseas Trusts) [2011] EWHC 2708 (Fam), he similarly held that ‘Fairness is not to be sacrificed on the altar of finality’.

By 2017, in WM v HM [2017] EWFC 25 (the first instance decision in Martin), his view was that ‘a Wells sharing arrangement should be a matter of last resort, as it is antithetical to the clean break’. The following year, King LJ took a similar approach in Versteegh, saying that Wells sharing should be ‘approached with caution’, though in the circumstances of the case, where H’s business could not be valued, it was ‘hard to know’ what else could be done. Lewison LJ in his concurring judgment indicated that Wells sharing should only be used when it was ‘the only option left’. A few months later, Moylan LJ in Martin endorsed King LJ’s approach. Mostyn J continued this line in A v M [2021] EWFC 89, holding that ‘if there is to be Wells sharing it should be limited as much as possible’.

There is a sense among the profession, however, there may be more willingness to make Wells orders in appropriate cases than these pronouncements suggest. It is perhaps notable that in HO v TL [2023] EWFC 215, Peel J, in summarising the law on business assets and Wells sharing, did not suggest that it should be a ‘last resort’:

‘whether a business should be retained by one party, or sold, or divided in specie will depend on the facts of each case. Relevant features will include whether the business was founded during the marriage or pre-owned, whether it has its origins in one party’s non-marital wealth, whether the parties were both involved in its strategy and operation, the ownership structure of the business, whether Wells sharing is practical or realistic given that it will usually continue to tie the parties together to some extent, and how to ensure a fair allocation of all the resources in any given case.’

What factors will be considered when deciding whether to make a Wells order?

The fragility of the valuation

As Moylan LJ set out in Martin, ‘even when the court is able to fix a value [of a private company] this does not mean that that value has the same weight as the value of other assets. The court has to assess the weight which can be placed on the value … for the purposes of determining … both … the amount and … the structure of the award’. The less reliable the valuation, the greater the argument for Wells sharing. In some cases, fragility will stem from the nature of the business (e.g. a lack of comparables; a period of transition in the relevant market), in others it may relate to wider circumstances. In G v T [2020] EWHC 1613 (Fam), Nicholas Cusworth QC (sitting as a deputy High Court Judge) considered that H’s criticism of W for running a Wells argument ‘is misplaced. Particularly at a time of extreme economic turbulence, whether for the company, as in the latter half of 2018, or for the global economy as of now, an outcome in a case such as this where there are fundamental issues about the true value of a private company, its liquidity and the paying party’s available exit strategy may in not a few cases be met with an acceptable solution of the sort discussed in Wells’.

Where previous valuations, or previous projections on which the valuation relies, have proved unreliable, the case for Wells sharing will be bolstered. This was the situation in ES v SS, where H was a private equity fund manager whose reward on the sale of various investments depended on the sale prices achieved. During proceedings, one such investment – E Co – was sold, realising a payment to the husband of €49.9m, ten times more than the value ascribed to his interest by the single joint expert accountant based on the management company’s valuation. H nevertheless argued against Wells sharing of his interests in the remaining investments as contrary to the clean break principle, arguing that ‘unforeseen external forces’ were responsible for the situation which had arisen with E Co. As Cohen J commented, ‘that H received so much more for his interest in E Co than the accounts of XYZ suggested was probable feeds directly into the issue of whether W should be entitled to a Wells sharing order in respect of the outstanding [investments], and how much weight I can put on the valuations currently given to them’. He concluded that it would be ‘wrong … to ignore the history of the E Co exit … where W is entitled to a share in the assets and where any exit is likely to take place within a relatively modest timescale, [Wells sharing] is the best – indeed the only – way of doing fairness’. Similar approaches had been taken by Moylan J (as he then was) in P v P [2010] 1 FLR 1126 where between judgment and final order an offer to purchase shares was made for several times the value attributed to them in proceedings; and in Versteegh where it was noted that previous business forecasts had proved ‘wildly inaccurate’.

Practicality

Wells sharing is unlikely to be appropriate where implementation or enforcement would pose particular challenges. As Mostyn J put it in FZ v SZ (Rev 1) [2010] EWHC 1630 (Fam), ‘sometimes pure theory must yield to pragmatism’, in that case due to the assets’ interconnectedness with potential liabilities. Conditions attached to shares may also render Wells sharing impractical: in G v T Nicholas Cusworth QC noted that W had not pursued Wells sharing due to the ‘stringent restrictions on share sales and the evident hostility of the directors’. The level of antagonism between the parties can also render continued financial links especially undesirable, as in IR v OR [2022] EWFC 20 where Moor J noted that a dispute during the proceedings ‘shows just how much scope [Wells sharing] would give for further dispute’.

A Wells approach might be contra-indicated if the realisation of the future share is identified as being too far hence, particularly where realisation is contingent on active endeavour (as distinct from passive growth) over a protracted period.

Wells sharing will also be avoided where the complexity of the structures plus the asset-holder’s attitude mean the other party would be unlikely to realise their interest: in Barclay v Barclay [2021] EWFC 117 Cohen J held: ‘So complex are the structures that H has set up and so open to possible avoidance of an order are they, that any Wells type order could easily be avoided’; in Chai v Peng [2017] EWHC 792 (Fam) Bodey J considered that a Wells approach might leave W ‘facing the difficult and expensive task of having to chase shareholdings halfway round the world’.

By contrast, the fact that implementation would be straightforward and ‘not an onerous burden’ on H supported Wells sharing in ES v SS.

Need

How needs are to be met may determine whether Wells sharing is appropriate. In P v P [2007] EWHC 2877 (Fam) Moylan J declined to order Wells sharing as doing so would risk leaving W unable to meet her needs. By contrast, in Versteegh, the fact that the liquid element of W’s award would exceed her needs weighed in favour of Wells sharing. In a similar vein Mostyn J in WM v HM held that Wells sharing was ‘not so objectionable’ where it applied only to a small proportion of the applicant’s award.

Nuptial agreement

In Versteegh, the existence of a pre-nuptial agreement was considered relevant to whether there should be Wells sharing as it had included provisions protecting H’s business assets. For this reason – and others – H was not required to release cash from his business, potentially undermining its viability, to meet W’s claim.

Wells sharing and future endeavours

Issues of future endeavour often arise alongside Wells sharing as typically one party retains an interest in an asset on which the other will continue to work. This can be recognised through discounting or capping the sums shared. The competing issues were explored by Recorder Nicholas Allen KC in FT v JT [2023] EWFC 250, where W argued that the amount payable to H on realisation of her business interests should be capped by reference to their current value:

‘It is difficult to resolve because, on the one hand, if (as I have found) part of W’s business is matrimonial property to which the sharing principle applies then logically H should (in the fullness of time) receive his sharing entitlement. On the other hand it can be said that if this share has an ascertainable value now then this should be the upper limit (or cap) of H’s entitlement and any growth beyond this figure should be W’s and W’s alone. The contrary argument to this of course is that W is trading with H’s share and that she is being renumerated for her work … I have not found this issue easy to determine.’

Ultimately, he declined to impose a cap given that W would be trading with H’s share. He did, however, impose a sliding percentage, such that H would receive 17.5% of receipts (the marital element of the business having been assessed at 35%) until 2038 and 10% thereafter. The reduction was justified by reference both to W’s future endeavour and H’s need (the youngest child would turn 18 in 2038).

The approach will depend on the circumstances. In ES v SS, Sir Jonathan Cohen awarded W 50% of H’s payment on the sale of E Co, realised between separation and trial, and 40% and 20% of interests yet to be realised according to the proportion of the investment period which remained in the future. In CG v DL, where it was anticipated H would transfer his business, whose only value was in its future profits, in around 4 years’ time, Sir Jonathan Cohen held that due to H’s future endeavours only 35% of the business was matrimonial and W was awarded 17.5% of future profits for 4 years.

Conclusion

Twenty-one years after Thorpe LJ’s judgment, Wells sharing remains an important tool for achieving fairness in financial remedy claims, notwithstanding the tensions with the clean break principle. Thanks to the intervening years of jurisprudence, we now have some clarity on when this tool will likely be deployed.

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