Roula Harfouche and Anthony Theau-Laurent
Accuracy is a leading independent financial advisory firm. Its expertise relates to three situations: disputes, transactions and restructuring, with two integrated service lines that provide strategic/market and valuation input in each of these situations. Accuracy was founded in 2004, and now has over 300 consultants working in 10 countries in Western Europe, Asia, and North America.
Roula Harfouche and Anthony Theau-Laurent are partners in the London office of Accuracy. They specialise in business and IP valuations, particularly in dispute contexts, and in the assessment of complex damages in litigation and arbitration contexts. Here, they talk to Finance Monthly about the main dispute situations in which valuations are required and the particular challenges that valuers face in dispute contexts.
What are the typical dispute situations and forums in which valuations are required?
Valuations are mainly required in the following contentious situations and dispute forums:
In commercial litigation and arbitration, for disputes typically resulting from:
- Early termination of contracts and breaches of contract or warranties, including post M&A transactions. In these cases, valuations are required to assess the damages suffered by the claimant, and they are typically calculated as the difference between two values: the value of a business without or “but for” the breach or complained of act, and its actual value with the breach.
- Infringements of intellectual property rights (IPR). In these contexts, valuers are instructed to assess damages, which are typically calculated as the lost profits of the IPR holder on the sales that it lost to the infringer, in addition to the reasonable royalty payments that the IPR holder would have earned from the infringer in relation to the infringer’s sales that the IP holder would not have made.
- Shareholder or joint venture disputes, e.g. in case of minority shareholder oppression or in case of shareholder exit, where shareholders disagree on the value of the exiting shareholder’s shares.
Valuations are also needed in investment treaty arbitrations between investors and states or governmental agencies, e.g. in cases of expropriation. In these contexts, the valuer is instructed to assess the damages suffered by the claimant, calculated as the value of the investment but for the complained of acts of the government, less the actual value of the investment.
Finally, in litigation and increasingly in arbitration, valuations are required in divorce contexts (Family Court in the UK) in which the valuer is usually instructed to value businesses, or shares in businesses, or other assets of one or both spouses.
A valuer may be appointed by a party or appointed jointly by opposing parties in an expert determination. In this process, the valuer determines the value of the business or asset in question, after taking submissions from both parties, and the parties agree to be bound by the expert’s valuation.
What valuation methods do you use in dispute contexts?
The valuation methods used in dispute contexts are similar to those used in non-contentious situations, namely: the income approach, the market approach, and the asset-based or cost approach.
A specificity of valuations in dispute contexts is that the valuation date can be set in the past. As a matter of legal instruction, the valuation date can indeed be either the date of breach or the date of the award or judgement. The former raises the question of the use of hindsight by experts, as they have access when they prepare their reports to information that was not known at the valuation date. When experts are instructed to disregard the information available after the date of breach, they need to rely on contemporaneous forecasts at that date. If, however, experts use hindsight, the impact of such information on the risk associated with historical cash flows has to be considered, and the assessment of damages has to be updated as the dispute progresses.
Another specificity of dispute contexts is that the assessment of damages typically requires two valuations to be produced: one valuation with the breach (actual) and one without (or but for) the breach.
What specific challenges do you face when performing valuations in dispute contexts?
A number of challenges result from the adversarial nature of disputes, in particular in common law countries. Every valuation report is subject to scrutiny from an opposing expert’s team aiming to find errors and inconsistencies. So particular attention to detail, rigour and sense-checks in arriving at and supporting assumptions is required. In addition, if the case progresses, valuation experts testify in the hearing/trial and are cross-examined by opposing counsel, which can be a challenging experience.
In disputes, one of the parties typically has access to the information needed, and may be reluctant to provide it because it does not suit its case. As a result, the disclosure or discovery process by which the information is requested can be lengthy and expensive, and not always entirely successful.
Valuation experts, particularly in the UK, owe a duty to the court or tribunal that overrides their duty to the client. Finding the right balance between those duties can be delicate.
Finally, in expert determinations, a specific challenge for the valuation expert is to design and follow due process, the objective being to ensure that both parties have had an opportunity to present their views.
 See Spotlight on Business Valuations in Finance Monthly Magazine – May 2015