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Godknows Hofisi
Disputes over the valuation of businesses or shares are common and will not go away for as long as the business is done and money is to be made.
Such disputes may spill into arbitration if there is an arbitration clause or agreement in the contractual document such as a shareholders’ agreement, share allotment, or issue agreement, etc.
In this article, I look at the use of experts when attempting to resolve such disputes.
Use of experts
At law, including arbitration, the use of experts is permissible. So a party to a dispute or arbitration may use its own expert to its advantage. An arbitrator may also direct that a certain expert be made use of depending on the situation.
The following are some of the areas where an expert can be used:
Valuation of assets
Valuation of a business or shares may involve accounting for the assets. In such situations, assets such as property, plant, and equipment have to be valued to determine fair market values. It may be ideal to use independent professional valuers such as registered valuers.
Each party may also engage its preferred property valuer to place values on the assets. The valuers will consider factors such as the condition of the asset, market values and so on.
Where the Net Asset Method approach is being used the assets need valuation. It is from the total assets that liabilities or debts are then deducted to arrive at the Net Asset value.
A party may then ask its asset valuer to testify in an arbitral hearing as an expert witness in favour of that party’s position.
The opposing party may cross-examine the expert witness to discredit the evidence. That opposing party may also bring its own expert witness who will testify in its favour. The witness may also be cross-examined by the other party.
Own business or share valuation
Instead of a mere valuation of assets, a party may instead engage its expert to carry out the valuation of a business or shares using different methods. The valuer may make use of results from work done by other experts such as asset valuers or auditors.
Valuation methods used by the expert may include the Net Asset or Break-up method, the Net Present Value (NPV) or Discounted Cashflow Method (“DCM”) which relies on future cash flows.
Results of the valuation can then be presented as expert evidence. The valuer usually attends the arbitral hearing to testify and to be cross-examined. The arbitrator will then decide between the valuations done by the opposing parties.
Audit or financial verification
Auditors are very useful where reliable financial information is required for decision making.
It may be necessary for the full set of financial statements for a business to be audited for certain agreed-upon periods. Auditors serve that important purpose. Alternatively, parties or the arbitrator may ask the auditor to carry out certain tasks.
These may include for example verification of liabilities to be subtracted from total assets under the Net Asset Method or the Enterprise Value (EV) under the NPV or DCM.
Review of financial information
Accountants may be engaged to carry out a review of financial figures where an audit is not possible or required. Such a review may give a reasonable degree of comfort to the users of the financial statements for purposes of the valuation.
Conclusion
The use of experts may be desirable as it may speedily deal with certain technical issues, particularly on the values.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]
or [email protected]. Visit www//:hofisilaw.com for more articles.
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