Over recent years expert determination has becoming increasingly popular as an effective way to resolve valuation disputes. But how does it work in practice? Is it an approach worth pursuing, and how can it help lawyers to achieve better results for their clients? Jay Shaw, partner at Forensic Advisory Services, regularly acts in the capacity of expert determiner and believes the approach can work well. He explains some of the key issues, including the key role that legal advisors play in the process.
Expert determination is the appointment of an independent expert to resolve the subject matter of a dispute after negotiations have broken down. By prior agreement between the parties, the expert’s decision is legally binding.
Typically this process is used in valuation disputes over the sale and purchase of business ownership interests – such as disputes over completion account values, or over the value at which a departing owner (perhaps an employee or joint venture holder) will sell their interests (usually to the company or another owner). It can also be used in other situations, including economic damages or business interruption claims, where a discrete valuation issue is involved.
Dispute clauses provide the mandate
An expert determiner is engaged because the dispute clauses in the relevant legal agreement have been triggered. Lawyers play a key role in making sure those clauses are appropriate to the circumstances – and that the expert determiner has a clear understanding of their meaning.
Generally the expert will be brought in to determine the value (usually “fair value”) of an asset if the parties cannot negotiate an agreed value. They will be required to make either a “speaking” (providing reasons for their decision) or a “non-speaking” determination.
In most cases, the decision of the expert determiner will be final and binding on all parties (outside very limited circumstances including where there is a “manifest error”, fraud or bias, or the expert materially departs from the scope of their instructions). Binding expert determinations are difficult to overturn, and I am aware lawyers can further protect against this risk by:
- opting for a non-speaking determination, which is less likely to be appealed; and
- stating that the expert is not required to address matters of law that should be decided by the Court, such as the expert’s jurisdiction1.
Although the decision as to a speaking or nonspeaking determination depends on the circumstances, I was recently involved in a case which illustrates the benefits of opting for a non-speaking determination.
We were instructed to review a reasoned expert determination for any errors that an arbitration tribunal might regard as “manifest”, which would have led to it being overturned.
Our review (and that of the opposing expert) identified a number of errors, some of which were significant – but because those errors largely offset each other, the overall assessed value was still reasonable. If reasons for the decision had not been given, the determination probably would not have been challenged.
The main feature of the expert determination process is its binding nature which, in turn, leads to lower overall costs, a faster process, and greater flexibility and certainty over timing compared to other forms of dispute resolution. Other benefits include:
- it is only required if the parties are unable to negotiate a value;
- the value is determined by someone with specialist valuation expertise;
- the process can be operated confidentially and transparently; and
- it is a less adversarial process than litigation or arbitration.
The following real world examples show how expert determination can lead to effective outcomes.
Making the most of pre determination negotiations
In most cases, dispute clauses allow a period for the parties to negotiate an agreed value, giving them an opportunity to settle the dispute before an expert determiner is appointed. During this phase, it is always important to be mindful of the value an expert determiner might be likely to assess, and to have this in your back pocket during negotiations.
Recently, I was involved in advising a 40% joint venture (JV) holder selling their interest to the 60% JV holder. The 60% JV holder did not appoint a valuation advisor, so they did not appear to fully understand how an expert determiner might value the shares (which may have reflected a minority discount and ignored any purchaser benefits, both reducing the value). This meant the 40% shareholder was able to negotiate a higher price than an independent valuer might have placed on the shares.
Most dispute clauses do not state whether details of the failed negotiations should be disclosed to the determiner. This can be a difficult matter to agree at the end of the negotiation process, and disclosure has both pros and cons. However, most valuers prefer to understand where the negotiations led to, as a reference point for their determination.
Reduced timeframe and costs
A major benefit of expert determination is that it is much faster and less expensive than litigation or arbitration. A relatively typical process agreed with the parties is:
- the parties provide documentation and submissions to the expert;
- the expert makes independent enquiries, then produces a factual memorandum;
- the parties comment on the factual accuracy of the memorandum; and
- the expert issues their final determination.
The entire process is normally conducted within an agreed “reasonable” timeframe, to avoid both unnecessary delay and any time pressures that could compromise the process. Legal advisors play a key role in helping their clients prepare their submissions, and ensuring that each stage of the process is completed within the agreed timeframes.
Although this approach is fairly typical there is no single agreed process, so it can be tailored specifically to the circumstances.
In one case, which involved an employee’s minority interest in a clearly insolvent company, we prepared an independent valuation of the shares using the same value parameters as the expert determination. The employee accepted this report, which showed that the shares had no value, avoiding the need for a more formal determination process.
Resolving difficult disputes
Another advantage of the expert determination process is that it can sometimes assist in resolving seemingly irreconcilable disputes. In one case, we were appointed by a company to determine the value of a minority share interest. The minority shareholder complained of “oppressive conduct” and so agreed to participate in the process, but not be bound by its outcome.
We ran a process similar to the one described above. Both parties were able to see the opposing party’s position from their submissions made. Our factual memorandum then enabled all the parties to reflect on the facts relevant to the valuation.
Some time later I learnt that although the minority shareholder did not accept our determined value, the dialogue created during the process enabled the parties and their legal advisors to negotiate an agreed value.
Because of its binding nature, expert determinations can be an excellent way to resolve valuation disputes quickly, at a lower cost, and with more flexibility than other forms of dispute resolution.
Jay Shaw is a partner and the head of litigation support at Forensic Advisory Services, a specialist firm of forensic accountants and investigators. It specialises in forensic accounting and business valuations, including expert determinations of value.
- See, for example, Barclays Bank Plc v Nylon Capital LLP  EWCA Civ 826