Grant Thornton's Jay Shaw shares practical considerations to ensure the best outcomes
Expert determination, fundamentally the use of a subject matter expert to help resolve a dispute, is a common mechanism to obtain a final and binding opinion on private company share value in New Zealand. Expert determination clauses are often found in standard form company constitutions, and in many different forms of ownership agreement, including shareholder, JV and partnership agreements.
An advantage of expert determination is the flexibility it provides, with the parties deciding all matters including the procedure, the expert and their role, and the way the decision might be enforceable. However, it is also this flexibility that can lead to a poor process – or the derailment of a good one - that at worst can mean a “final and binding” determination is overturned.
Based on our experience in expert determination valuation processes, both as determiner and as the expert appointed by one of the parties, here are five things to consider when seeking an expert determination on share value.
1. Choose your expert wisely. Running a fair and transparent process is crucial to ensuring natural justice is observed, and a final and binding outcome obtained. This means the expert selected should be competent not only in valuation, but also in running an effective process – including understanding where their mandate starts and finishes. So, prospective experts should ideally be quizzed on both their valuation and previous expert determination credentials.
On a side note, many may be unaware that Chartered Accountants Australia and New Zealand (CAANZ) no longer provide presidential nominations for valuation experts, but instead refer parties to members who are Business Valuation Specialists - Chartered Accountants formally recognised to have undertaken specific relevant study and gained experience to the level that they are considered to have specialist skills in business valuation.
2. Allow enough time for the process. Once the expert is agreed, a robust expert determination process requires a period of information gathering, party submissions and responses so the expert can then write their decision. Guided by the expert, the process should be conducted within an agreed ‘reasonable’ timeframe, to avoid both unnecessary delay and any time pressures that could compromise the process. This often takes longer than you might think. On average, allow 2-3 months for a robust process to be undertaken.
3. Make sure you know what you are getting. In Peregrine Wines, one of the Defendant’s arguments was that the valuer provided inadequate reasons to support their valuation. However, this argument failed - the High Court found neither the expert determination clauses nor the valuer’s appointment terms placed any obligation on the valuer to provide support for their valuation.
The simple message is that where parties wish to ensure the valuer gives reasons for their decision, as opposed to a certificate of value, an express term to that effect should be included in either the reference or appointment terms.
4. The experts’ decision is likely to be difficult to overturn. This is provided that the determination is carried out as required by the terms of the contract. For example, as indicated by the Court of Appeal in Peregrine Wines, should the contract specify the expert only to fix fair value, then the parties, in effect, entrust the expert “to carry out the valuation and agreed to be bound for the purposes of the share transfer by the fair value assessed in the exercise of the expert’s independent skill and judgment, acting honestly and in good faith. If the valuation was carried out incompetently, the affected party would have a remedy against the expert but no right to resist the share transfer at the price fixed” (p41).
This suggests that should the parties agree that the valuer is to follow certain valuation principles, processes and procedures, they should include these in the reference terms. That might include, for example, whether a minority discount to the shares should apply to the valuation.
5. Who pays? A dispute over how the expert’s costs will be met is the last thing either party, and the expert, will appreciate at the end of the process. So, the reference or appointment terms should set out clearly the basis on which the expert’s costs will be met. Many options are available, including costs to be met by the company, by shareholders in proportion to their holdings or equally. In our experience, a sensible approach is to allow for the expert to be guided by the parties’ wishes regarding costs, but to have the final say on their allocation.
Jay is a Partner at Grant Thornton New Zealand and leads the firm’s valuation and forensic accounting practice. He is a CA Business Valuation Specialist and committee member of the CAANZ Business Valuation Special Interest Group. He sits on the Business Valuation Board of the International Valuation Standards Council (IVSC), the leading global valuation standard setter.
For a white paper on the valuation of share interests under expert determination, please contact him on +64 21 192 3347, or at [email protected].