Court rules against divorcing husband on startup value

Judge Ronit Gurwicz Photo: Court website

The court ruled the wife is entitled to half the value of the startup, even though it was sold more than a year after the couple separated.

Is a wife entitled to half the value of a startup even if it is sold more than a year after the coupled separated? The Family Court in Nazareth recently said that she was. Judge Ronit Gurwicz ruled that when the startup involved was founded by the husband during the marriage and he owns shares in it whose value are indeterminable until the company is sold, the value of those shares for the family settlement is according to the later date when they were actually sold, even though this was more than a year after the couple separated.

At the same time, Gurwicz has nevertheless not yet ruled on the startup founding husband's argument that he developed a new product including improvements made after the separation involving his investment in labor and in the company and various measures that he took, including the recruitment of investors. Her ruling on these matters after hearing closing arguments in the case will determine whether the wife is entitled to millions of dollars or to a minimal amount.

Proven value at the time of the sale

The ruling deals with a dispute between a couple who separated several years ago, shortly before the husband sold a medical startup he founded to one of the world's largest biopharma companies for tens of millions of dollars. Only a few million dollars were invested in the startup (the details and dates have been omitted in order to prevent identification of the people and company involved). The husband, a founding partner in the startup, accumulated options in the company, which developed a unique product and patented it. The sale of the startup was reported in the economic press.

Even before the sale, the court appointed an expert, Gad Shapira, one of Israel's best-known actuaries, to assess the value of the company founded by the husband with his partner and the wife's share of it. While the expert was completing his examinations and preparing a report for submission to the court, however, the wife discovered through various reports (in the media, among other sources) that her husband had sold the company to one of the world's largest companies for millions or tens of millions of dollars.

Shapira stated in his report that it would be incorrect and unfair to the couple to assess the company's value at the stage at which he examined the facts - the stage at which actions were being taken to find an investor for the startup and actions aimed at upgrading and developing the product. He wrote that the assessment should be made when the fate of the company's invention is clearer.

Shapira found that the woman and her husband were not professional investors buying a company on the financial market with their money, with their investments joining a pool of investments and risks. He noted that professional investors offset high-risk investments by combining them with lower-risk investments and said that the husband and wife were not investors of this type.

Shapira added that were he to determine the company's value according to the usual practice between a voluntary buyer (investor) and a voluntary seller, it would include a very high risk factor that should not be included in relations between a couple. He therefore found that the woman had the right to half of the husband's shares in the startup, and that the valuation should be conducted when the fate of the invention and the company are clear - whether or not it is sold.

Shapira's conclusions were stated without referring to the sale, even though the sale took place even before they were submitted to the court. The wife argued that the sale had been concealed from her and from Shapira, and Shapira also confirmed that he had not known about the sale when he drew up his opinion.

After learning of the sale, Shapira nevertheless insisted that because the company involved was a startup, it was necessary to wait two years to see whether the sale really took goes through and how much money the husband receives. He stated that the very high risk in medical startups made it impossible to determine an artificial value as of the date on which the couple separated because the value is actual proven only in a sale.

New product after the separation

The husband refused to concede. Through his lawyers, Advocates Yair and Doron Shiber, he disputed Shapira's ruling. He argued that the value of the wife's stake in the shares should not be assessed because the sale had taken place over a year after the separation. He asserted that the product involved was a new one developed after the separation date and the wife was not entitled to any share in it.

According to the husband, Shapira's conclusions were wrong, among other things because he had not recognized that facts about the development of the new product that had been sold, had not considered the entry of a new investor into the company six months after the couple separated, and was not a specialist in valuation of startups. In these circumstances, the husband asked to submit an opinion on his behalf for determining the company's value, who would explain why the company should be valuated as of the date of the separation, not the date of the sale.

Through her lawyers, Advocates Roy Sidi and Aviad Shanon, the wife argued that even though the sale had taken place after her separation from her husband, work on development of the product had taken place while they were still together, and that she was therefore entitled to half of the value of the sale. She said that she had enabled her husband to develop the product by raising their children, instead of working in a profession.

The wife also argued that even though the husband had concealed facts from Shapira, the latter had done thorough work proving that the critical mass of development of the product sold predated the rift between the couple. She said that under these circumstances, there was no need for a new expert.

Entitlement: All or nothing

Gurwicz accepted some of the wife's arguments. She endorsed Shapira's opinion, ruling that his conclusion that the startup founded by the husband during the marriage should be valuated as of the date of the sale, not earlier.

She also noted, however, that Shapira had said that a case was possible in which a different product was developed after the couple separated, or in which the company is sold four or more years after the date of the split, in which case the wife's share would be less than half of the actual sale value. The court therefore ruled that the husband had to prove that at the time of the sale, another product developed by the company after the separation had been sold, not the product on which it had worked when the couple were still married.

The judge added that Shapira's view was in accordance with jurisprudence concerning the value of startups. She rejected the husband's petition to summon another expert he had hired in order to prove the value of the company as of the separation date, and ruled that the parties now had to submit their arguments to the court, which would rule on the wife's argument that she was entitled to half the amount received by the husband for the company.

Sidi said, "The ruling that the monetary value of the company should be determined according to the exit made, not artificially according to options and shares on paper before the sale, affects all the cases involving this issue.

"There are many cases involving high-tech companies and startups in which the question arises of whether a spouse is entitled to half of the value of the shares before the sale, i.e. the shares on paper, or the value after the sale, when money is obtained. Shares in a startup are usually worth nothing, but after an exit, they are worth a lot of money. It's all or nothing."

Published by Globes [online], Israel business news - en.globes.co.il - on October 7, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Judge Ronit Gurwicz Photo: Court website
Judge Ronit Gurwicz Photo: Court website
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