Recent and recurring issues in contentious valuations

In this article, Ben Crowne, Director of Forensic Accounting, highlights recent and recurring issues in contentious valuations and stresses the importance of the need for both experts and their instructing lawyers to provide robust valuations and quantifications.

The recent judgment by Mrs Justice Cockerill in Recovery Partners & Ors v Rukhadze & Ors ([2022] EWHC 690) highlights a number of important issues for both experts and their instructing solicitors.

The case relates to the late Georgian billionaire Arkadi ‘Badri’ Patarkatsishvili, and a dispute between his family and the entities who sought to identify and recover the estate from its “unconventional asset owning structures”. The disputed assets included a large metalworking factory near Tbilisi and a Georgian TV network which was substantially loss-making but acknowledged to have “political value”.

Expert testimony

This was a lengthy and complex dispute which included more than 30,000 transactions over a 10-year period. The trial stretched over five weeks and included four valuation experts.

A significant issue in the trial was “the increasing practice of expert witnesses adopting the work of others as part of their expert reports” (in this case, the inclusion of a property valuation as part of a company valuation). HHJ Cockerill noted that when this evidence was contentious, “the expert should not be tendered on that point unless they can satisfy themselves that they can themselves properly master and give the relevant evidence”. In the event, various aspects of the experts’ work was entirely disregarded.

Other recurring issues included the tendency of multiple experts to understate the extent to which they relied on instructions/assumptions, or “marginal” evidence, and the limitations of expert testimony when not all relevant documents have been considered.

Valuation

Valuation of the disputed assets was challenging, with all experts having limited information and being reliant on instructions and assumptions from their clients.

With various elements of both parties’ cases being excluded from consideration, one company was valued on a single piece of “less than entirely satisfactory” evidence, which HHJ Cockerill acknowledged was higher than they would have reached “left to myself”.

Given the limitations of available information, both approaches were critically assessed in detail. One expert presented a valuation on the basis of a multiple of maintainable earnings and was criticised for replying on “dubious” and “somewhat skewed” comparables. A discounted cashflow (valuing the company on the basis of forecast future cashflows) was reviewed and adjusted in the judgment on a line-by-line basis.

However, this led to an unforeseen complication subsequent to the trial. Although both parties ultimately provided valuations on the basis of forecast cashflows, applying the judgment’s adjustments led to a valuation massively below the disputed range ($3m compared with a lower-bound of $17.5m). This which will require further expert input to resolve.

Commentary

Company valuations is often a complex and judgemental area, in particular in markets with few comparables or data sources. This can be compounded by issues in evidence-gathering and disclosure. Experts should not seek to minimise these limitations which, in our experience, will inevitably be drawn out by their counterparts and during cross-examination, at the expense of their credibility. Judges (including in this case) continue to value and praise experts who are willing to concede ground and highlight areas of agreement.

Another complicating factor in this case was the tension between experts’ overriding duty to the Court and the restrictions created by client instructions. Lawyers should weigh carefully the extent to which instructions assist or undermine the value of instructing an independent expert, and plan for the contingency should a particular set of assumptions be dismissed. Although the Joint Statement process is designed to help clarify areas of disagreement, it was of limited use in this case where the experts’ instructions clearly impaired their ability to narrow scope, or present valuations on a comparable basis.

We often see cases where valuations have been performed on incompatible assumptions or fact patterns. Although this may assist in pre-trial litigation strategy or to assist with a settlement, they can easily lead to litigants forming unrealistic expectations as to the strength of their claim or the likely quantum of an award. They also force the Court to reach conclusions on individual inputs to a valuation, rather than on the award itself, increasing the uncertainty to all parties. This makes it more difficult for a judge to apply an intuitive or ‘common sense’ check on quantum, as seen here.

Above all, both experts and their instructing lawyers need to be mindful of the need to provide valuations and quantifications which are robust and responsive to the disputed issues. It is striking that, given the considerable efforts by both parties and a range of experts, the largest company in the dispute still remains unvalued and uncertain, and the second largest was valued effectively by default and likely at an overvalue.

Ben Crowne is a Director in the Forensic Accounting & Investigations team at Our Restructuring and Advisory Division Advisory Limited. He has significant expertise in valuing businesses and shareholdings within them. He is involved in both contentious and non-contentious valuations.