Executive Divorce

<FONT SIZE=+2><b>F</b></FONT>irst comes love. Then comes marriage. Then comes a baby carriage, a house, a family business, another baby carriage, a privately held company, baby number three, shares in a publicly traded company, a cottage at the lake, stock options in a couple of joint ventures, RRSP accounts, appointments to various boards and the associated perks, twins, a secret bank account in Liechtenstein, another one in the Caymans (Switzerland’s not so safe anymore), a rental property in the inner city, an affair or two, a pension to die for, estrangement, a trial separation…and finally, divorce.<br> <br/>But wait. Before the divorce, you’ve first got to strip naked in front of your ex and her (or <br/>his) lawyers and accountants—financially speaking, of course. The first step in the ultimate anti-merger consists of providing your ex with an exhaustive list of your each and every asset. <br> <br/>The necessity of full financial disclosure, one of the key outcomes of the 1986 Family Law Act, has had a profound impact on the practice of family law, particularly when high-net worth individuals with complex commercial holdings and tangled, often intangible, assets cut the knot. The stay-at-home wife has been the primary beneficiary, but another result has been the buffing up of the tarnished image of the divorce lawyer. <br> <br/>Family law practitioners know the score. They know most of the lawyer jokes are about them. They know their clients—and especially their clients’ exes—think of them as “sharks,” “leeches,” “lowlifes,” “hyenas” and, of course, “barracudas”. “I’ve had all sorts of labels applied to me. Gutter fighter, ball breaker, bitch, dog fighter,” recounts Julia Turnbull, Q.C., of Calgary’s Turnbull Grobman. “I take it as a compliment. Now.” “It’s cool to say my divorce lawyer is a barracuda,” agrees Turnbull’s former partner, Judy Boyes, Q.C., now at Scott Hall also of Calgary. <br>
Executive Divorce
First comes love. Then comes marriage. Then comes a baby carriage, a house, a family business, another baby carriage, a privately held company, baby number three, shares in a publicly traded company, a cottage at the lake, stock options in a couple of joint ventures, RRSP accounts, appointments to various boards and the associated perks, twins, a secret bank account in Liechtenstein, another one in the Caymans (Switzerland’s not so safe anymore), a rental property in the inner city, an affair or two, a pension to die for, estrangement, a trial separation…and finally, divorce.

But wait. Before the divorce, you’ve first got to strip naked in front of your ex and her (or
his) lawyers and accountants—financially speaking, of course. The first step in the ultimate anti-merger consists of providing your ex with an exhaustive list of your each and every asset.

The necessity of full financial disclosure, one of the key outcomes of the 1986 Family Law Act, has had a profound impact on the practice of family law, particularly when high-net worth individuals with complex commercial holdings and tangled, often intangible, assets cut the knot. The stay-at-home wife has been the primary beneficiary, but another result has been the buffing up of the tarnished image of the divorce lawyer.

Family law practitioners know the score. They know most of the lawyer jokes are about them. They know their clients—and especially their clients’ exes—think of them as “sharks,” “leeches,” “lowlifes,” “hyenas” and, of course, “barracudas”. “I’ve had all sorts of labels applied to me. Gutter fighter, ball breaker, bitch, dog fighter,” recounts Julia Turnbull, Q.C., of Calgary’s Turnbull Grobman. “I take it as a compliment. Now.” “It’s cool to say my divorce lawyer is a barracuda,” agrees Turnbull’s former partner, Judy Boyes, Q.C., now at Scott Hall also of Calgary.

When emotions, stakes and acrimony run high, clients like to cling to the stereotype. Family law practitioners, however, see themselves, their profession, and their image in a different light. And they credit family law rules that require full financial disclosure in divorce proceedings, and the complexity of high-net worth divorce files, for much of this image makeover.

“Twenty-five years ago, divorce lawyers were hawks—everything was tough and hardball,” says Stephen Grant of McCarthy Tétrault’s Toronto office. “Now, if you look at the top level of the bar, lawyers are responsive, reasonable, and settlement-oriented.” Grant believes that over the last two decades, there has been a changing sensibility of the family lawyer’s role, from that of a “hawk” to that of a facilitator of resolutions—a problem solver. He believes financial disclosure requirements fueled this change, affecting the attitudes of lawyers and divorcing clients alike.

While disclosure got rid of some of the court room “posturing” and dramatically increased the ratio of cases that got settled—85 per cent of all divorces never see a day in court and as few as five or seven per cent actually get resolved there—it created new challenges. “For many professionals and business people, it’s like taking your clothes off in front of everybody,” says Andrew J. Freedman of Cole & Partners, chartered business valuators in Toronto. “Both business people and professionals recoil at the thought of being compelled to disclose in writing the intimacies of their financial affairs, especially when they have acted in a secretive manner during the marriage, or with their business partners.”

Nothing is sacred in disclosure, and there are no secrets left once it is done. Personal income is just the beginning. Both spouses must disclose all their assets, including capital stock of publicly traded and closely held corporations, stock rights and options, share warrants, bonds and debentures, GICs, term deposits, interests in limited partnerships, commercial partnerships and joint ventures, pensions plans, retirement accounts, put options, call options, and even funds secreted in tax shelters. Personal income is frequently inseparable from business income, and disclosing business income requires the production of all relevant documents, from audited financial statements to schedules of unrecorded deposits held in escrow by third parties.

In the vast majority of the high-net worth cases, where millions of dollars and dozens of companies are involved, it is still the husband who controls the assets, both in name and otherwise. The wife is frequently unaware of both the scope of the matrimonial assets and the true family income. “Many of these men are used to playing a closed hand,” says Freedman. “They’ve never discussed the details of their business dealings at home. Now they have to tell all to strangers?” Not to mention a person from whom they are now emotionally estranged!

When disclosure was first introduced, clients were “shocked” and “appalled” at the intrusiveness and depth of the exercise, say seasoned family law practitioners. “In a family law proceeding, virtually all financial information is relevant,” notes Paul Albi, of the Vancouver office of Davis & Company. “Even sophisticated business people who have considerable experience in the legal process find the divorce disclosure process incredibly intrusive. Imagine being cross-examined on your income tax statement and your personal expenses. I can’t think of any other type of legal proceeding that’s as all encompassing and intrusive.”

“Today,” says Boyes, “in Calgary the population, particularly of wealthy entrepreneurs and business people, is more educated. The divorcing millionaire knows he has to disclose, disclose, disclose. But that knowledge does not make it an easy process.” “If the husband has been ‘misbehaving’ throughout the marriage, squirreling money away, he’ll be reluctant to disclose,” says Gerald Sadvari, with McCarthy Tétrault in Toronto. He may be reluctant to disclose even if all his dealings are perfectly above board. “There may be either less money or more money than people, including the wife, think there is,” suggests Thomas Bastedo, Q.C., of Toronto’s Bastedo Stewart Smith. Either outcome is potentially embarrassing to the client.

He may also be afraid that the value of his assets will be inflated or misunderstood. And, of course, there is the question of unduly exposing himself—pardon the pun—to competitors and maintaining the confidentiality of multi-party business arrangements. “If they are one of several partners or shareholders, they don’t want to betray the confidence of their business partners,” notes Alfred Mamo of Mamo & Associates in London.

While a confidentiality agreement may allay some of these fears, it never quite removes them. And once the husband starts producing papers, the paper trail may be without end. Sorting it all out is difficult even if the moneyed partner makes no difficulty about disclosure.

“In most of these cases, nobody knows how much the husband is worth—not even the husband. And it’s not only expensive to find out, it’s almost impossible. You can only arrive at a range,” explains Malcolm Kronby, Q.C., of Epstein, Cole in Toronto. Frequently, says Kronby, a high-net worth individual will say, “For me to make that type of disclosure will take months and cost hundreds of thousands of dollars, and the result will be beyond anyone’s comprehension.” And he’s right. Lawyers will often accumulate six to ten thick binders of documents, spending months of the client’s time and thousands of dollars of his money, and find they’re no closer at determining his true income and the “real” value of his assets.

“A settlement without disclosure is not worth the paper it’s written on,” says Philip Epstein, Q.C., of Epstein, Cole. But although law students are taught that it’s negligence not to do a full disclosure, it’s not unheard of for a wife to settle for $10 million without finding out, at a cost of $100,000-plus, if the husband is worth $20, 30 or 40 million.

“If my client assured me that she was familiar with her husband’s assets, then it’s possible, perhaps, to do a settlement without full disclosure,” says Sadvari at McCarthys tentatively. The risk, however, isn’t really the wife’s—if she later feels she got too little, the fact that the settlement was made without full financial disclosure leaves the husband vulnerable. The courts have shown themselves perfectly willing to reconsider agreements more than a decade after settlement—to wit, Bailey v. Plaxton. Married in 1965, divorced in 1985, Beverly Bailey—represented pro bono by Harold Niman of Niman Zemans Gelgoot—and Alan Plaxton—represented by Stephen Grant of McCarthy Tétrault—were back in the courts in March 2000, to revisit spousal support 10 years after payments, in accordance with their divorce agreement, ceased.

Once all the assets are on the table, the two sides have to agree on their value. And if disclosure felt like purgatory, valuation can be hell. Executive divorce has created a whole cottage industry of valuators. In addition to business valuators, who determine the value of stocks, shares, privately held companies and other business assets, and forensic accountants, who track unaccounted cash income and hidden assets socked away in tax havens, experts in art, numismatics, philatelistics and antiques may be brought in to determine the countable and dividable, as well as the intangible, value of the matrimonial assets.

“If you’re not careful, you could spend all your client’s money on valuation,” cautions Philip Epstein. A valuation can drag on for years—an average one in the high-income bracket takes 18 months—and its pricetag can run into hundreds of thousands of dollars, as new issues continue to crop up. The question of how to value stock options is a contentious one right now, according to James McLeod of Mamo & Associates. Tomorrow, there will be others—the field does not stand still.

Neither do corporate and personal assets, and because they fluctuate, a valuation often begins with a dispute as to the valuation date itself. In Ontario, the valuation date is the date of separation, but it is common for the wife and the husband to have a different idea of when that event took place, particularly if his investments or income changed significantly during the time of estrangement. Andrew Freedman at Cole & Partners recalls being involved in a case where the date of separation was in dispute by some 10 years. As a result, the relative difference in value of assets was enormous.

In Alberta, there is no date of separation as such. Legally, it’s the date the case makes it to trial. Julia Turnbull has been involved with several divorces where the assets had to be valued three or four times, as negotiations and litigation dragged on.

“Valuation is an art, not an exact science,” says Richard Wise, business valuator, forensic accountant and Managing Partner of Wise, Blackman in Montreal. That’s why it’s possible for the range of value to span some $20 million, as it did in the messy and high-profile divorce of George Montague Black III back in 1988.

Black’s divorce from wife Mariellen was one of the first major cases under the newly implemented Family Law Act. Grant and Sadvari, then at different firms and now both at McCarthys, acted for husband and wife respectively. Each side had business valuators and accountants assigning numbers to Black’s extensive assets.

Black’s team valued his assets at $9 million. The team acting for his ex came up with $30 million. “And both sides were completely sincere and correct,” says Wise, who arrived at the $9 million figure.

The huge range in the Black case wasn’t caused by the fluctuating value of his assets, but by two different interpretations of value. Black’s valuators used stock market prices to determine the fair market value of his corporate holdings (and then, as is common practice, discounted it…a cool $5 million). His ex-wife’s valuators argued that because Black was such a major shareholder in his various companies, evaluating his assets at the same level as you would a minority shareholder was inaccurate. Instead of looking at stock market prices, they looked at each company’s cash flow, assets and particular incomes—just as they would in the case of a private company. The result—a $20 million gap between their evaluation and Black’s own more conservative number.

The courts went with the fair market value figure—minus the discount—and pegged Black’s value at $14 million, awarding $6 million to his ex-spouse. She had initially wanted to settle for $5 million. Lesson learned?

“A poor settlement is better than a bad lawsuit,” is the maxim by which Ean Maxwell, Q.C., of Vancouver’s Maxwell, Schuman & Company, conducts his practice, and the vast majority of Canada’s wealthy divorcees agree. Going to court is a huge risk for high-income earners these days.

“It’s open season on husbands in the courts,” says Maxwell. “It’s very difficult to be counsel to men today.” The pendulum of spousal support and gender bias in the courts has swung the other way, and while legislation such as the Family Law Act and the Federal Child Support Guidelines is gender-neutral, the application isn’t. In the court system, it’s easier for a wife to get support from a husband than it is for a husband to get support from a wife, and family lawyers believe the awards to wives are higher than comparable awards to husbands.

Outside the court system, women who have brought more money and contributed more revenue to the family patrimony are often shocked to learn that they will have to make equalization payments to their husbands. “They’ve internalized the double standard,” notes Eva Petras of Grassby & Associés in Montreal, even though they were not living it.

Many family lawyers believe that the Federal Child Support Guidelines, which came into effect in 1997, are hammering their high-income earning clients. “The Guidelines were supposed to make life easier, and for the vast majority of people-salaried employees, middle-class people—they did,” says Vancouver’s Paul Albi. “However, for entrepreneurs and high-income earners, they’ve made it very complex.”

Francis v. Baker, upheld by the Supreme Court of Canada in 1999, resulted in former lawyer Thomas Baker (represented by Stephen Grant of McCarthys) paying $10,034 per month in child support for his two teenage daughters. Baker’s marriage to Monica Francis lasted six years and legally ended in 1987. The case practically dictated the subsequent $9,200 and $17,000 per month child support payments, respectively, by hockey player Chris Simon (married for only two years) for his six-year-old son and by Toronto businessman Jeffrey Tauber for a then 19-month-old toddler. Both Simon and Tauber are still in the court system, fighting to reduce the amounts. The Ontario Court of Appeal sent Tauber—who is represented by Sadvari of McCarthys—back for retrial, agreeing that the textbook amount was excessive.

“When we’re advising clients who make more than a million, we’re not sure how to advise them,” admits Sadvari. Will the courts exercise discretion with respect to high-income earners, recognizing that little Johnny does not need two sports cars and a chauffeur, whatever his daddy’s income? Or will they continue to do everything by the book, i.e., the Child Support Guidelines table?

With child and spousal support court decisions “flying in every which direction,” as Albi sees it, it’s important to remember that the acrimonious cases that make it into court and into the scrutiny of the media and spotlight of the public remain the exception. “My job is to facilitate a settlement without litigation whenever possible,” says Grant, and he and his colleagues do that job well. The vast majority of divorce cases—75 to 95 per cent of the caseload of most practitioners—are settled.

Occasionally, as in the divorce of Charles Fipke, the discoverer and developer of Canada’s first diamond mine, settlement comes on the heels of litigation. Ex-wife Marlene Fipke got $125 million worth of shares in Dia Met Minerals Ltd., the “family” diamond mine business. The settlement was signed after five years of legal battles, but only one day after proceedings reached trial.

Usually, however, the more money is involved, the more likely a satisfactory and relatively amicable resolution. “On average, there’s less acrimony in high-net worth divorces, because there’s more flexibility,” says Sadvari. “Everyone can live happily ever after, whether it’s on $10 million or 12.” “You can throw money at the problem,” Philip Epstein agrees cynically. “After one, two, three, four million, how much more do you need?” concurs Maxwell.

More importantly, so long as husband and wife (and their lawyers) are negotiating, they exercise control over the outcome. Once they go to court, that control is gone, as is any chance of a “win-win” settlement. In fact, chances are that the only real winner will be Revenue Canada. “Judges pay little attention to tax efficient methods,” says Thomas Bastedo in Toronto. “A lot of judges are just not familiar with these situations.” And if they are familiar, they may not care. Legislation in most provinces splits all family assets down the middle. In the Western provinces and Ontario, the same goes for business assets acquired during the marriage. In effect, the courts play the role of King Solomon, splitting the baby in half.

The divorce of BEL-Tronics Limited’s founder Rudolph Sagl is a case in point. The 1992 divorce from his wife of six years Marie entailed the splitting of a family trust, an art collection valued at between $750,000 (his valuation) and $5 million (hers), properties in Canada and Barbados and proceeds from a patent lawsuit settlement. There were also issues of tax evasion and insolvency proceedings against BEL. Justice Ellen McDonald called the financial evidence presented by both sides a “debacle.” Nonetheless, she awarded to Marie Sagl a $4 million lump sum payment and $20,000 a month in support, as well as a net equalization payment of $350,000 on the fluctuating value of the family trust. Justice McDonald’s decision was based, effectively, on her best guess of the value of the couple’s assets.

For some high-income earners and their lawyers, disclosure and valuation bring up the ghost of hidden assets. “If somebody is actively hiding something, if they are not disclosing a local asset, that’s relatively simple,” says Dinyar Marzban at Vancouver’s Jenkins Marzban Logan. “But if it’s offshore assets, it’s very difficult. And the biggest problem is cost.” You have to hire forensic accountants, and the cost of a forensic audit isn’t just high, it’s frequently prohibitive. As Richard Wise in Montreal describes it, forensic accountants are financial sleuths, who use financial statements, income tax returns, correspondence with Revenue Canada, bank statements, business plans, applications for credit, personal credit card statements, airline tickets, hotel receipts, petty cash invoices, details of unusual expenses, lists of all third-party and non-arm’s length transactions—simply, everything—to find the amount of cash “socked away under the mattress or in a bank account in Switzerland.”

If a lawyer is acting for a husband who’s involved in something unethical, like hiding offshore assets, and who is unwilling to come clean with his lawyer, his spouse and Revenue Canada, the situation is simple. “You have to fire him,” shrugs Sadvari.

“The conundrum comes when you act for a wife who’s had the benefit of living a life on untaxed assets,” says Maxwell, and who wants to continue to live in that style post-divorce. Richard Wise, author of Financial Litigation - Quantifying Business Damages and Values, concurs. As a business valuator and forensic accountant whose practice takes him across the country, Wise is invariably involved in cases where there is significant disagreement over the facts as they pertain to matrimonial assets and their value. And if he’s doing a valuation on behalf of a wife who claims the husband’s reported income is wildly inaccurate, he urges her not to make denunciation threats. Many wives don’t realize that, having lived off the proceeds of these monies for 15, 20 years, they are party to “this black market money.”

If such a case comes to trial, and it becomes evident that the asset value put forth by the wife includes untaxed assets, judges are loath to award support that “effectively encourages the husband to continue tax evasion,” says Wise. Moreover, they are likely to share this information with Revenue Canada.

Many husbands, in the heat of the divorce, will prefer to report themselves and otherwise divest themselves of certain assets, rather than share them with an ex-wife. In the cases when there is both acrimony and a lot of money, says Judy Boyes, “an angry, sometimes vengeful, person has a greater financial ability to make it a difficult case.” And lawyers have to walk the line between client advocacy and problem resolution. “I am not the instrument of my client’s revenge,” says Malcolm Kronby forcefully.

“Executives, entrepreneurs—the people we represent in the high-stakes cases—are used to large commercial transactions,” notes Lynn Kassie, with Montreal’s Robinson Sheppard Shapiro. “But they sometimes lose the business perspective in divorce.” And it’s their lawyer’s job to keep that business perspective, and to “solve the problem” of the divorce. “A lot of people within our profession still denigrate family law,” Turnbull says. “I take umbrage at that. It’s a rich, complex field. It touches on taxation, corporate law, finances. And it’s fluid, constantly changing.”

Over the 15 years since the Family Law Act was enacted in 1986, family law practitioners have developed a high level of sophistication regarding complex financial issues. As Philip Epstein puts it, “We understand things and can do things that were unheard of in 1986.” Family law practice involves a variety of commercial issues, corporate matters such as company reorganizations, restructurings and butterfly transactions, tax-deferral and tax planning issues, estate planning, multi-party financial planning and more.

In addition to increasing the complexity and expense of some types of divorce, the “commercialization” of family law has also attracted lawyers previously scornful of the field. “There are lawyers who 15 years ago wouldn’t touch family law with a 10 foot pole,” snorts Ean Maxwell. “Now, they’re big matrimonial players.”

So has financial disclosure, so unpleasant for clients, finally redeemed divorce lawyers? Epstein, Cole, Toronto’s largest family law boutique, has prestige and reputation enough to accept only 20 per cent of the files referred to them. Conversely, most of the major law firms in Calgary, Vancouver, Toronto and Montreal eschew family law. McCarthy Tétrault’s strong family law group in Toronto is an exception, not the rule.

“They don’t want to be associated with divorce,” shrug family law practitioners. “All the better for us.” The soft-spoken Judy Boyes still gets called a barracuda, and worse. But then, when what’s at stake is your entire future and lifestyle, the last thing you want is a nice guy (or gal) at your side of the table. And although the leading family law practitioners describe themselves as “reasonable” and “fair,” we’re not talking Care Bears here.

“Personal hand-holding is not one of my strengths,” admits Stephen Grant, adding that even his own clients would describe him as tough (qualified, of course, by fair and reasonable). “I’m not the warmest guy.” After all, given the recrimination, guilt, bellowing and finger pointing often associated with divorce, at least at the outset, most clients still prefer to think of their divorce lawyer as a tough guy.



Marzena Czarnecka is a Montreal-based freelance writer.

Lawyer(s)

Julia A. Turnbull Judy N. Boyes Stephen M. Grant Andrew J. Freedman Paul R. Albi Gerald P. Sadvari Thomas G. Bastedo Alfred A. Mamo Malcolm C. Kronby Philip M. Epstein Harold Niman F. Ean Maxwell Eva Petras Dinyar Marzban Lynne Kassie

Firm(s)

Scott Venturo Rudakoff LLP McCarthy Tétrault LLP Cole & Partners Valuation DLA Piper (Canada) LLP Epstein Cole LLP Wise, Blackman Basran Robin Allen & Desilets Grassby & Associés Jenkins Marzban Logan LLP Robinson Sheppard Shapiro, s.e.n.c.r.l.