Valuation Analysis: The Role of the Expert in Litigation

Transcription

1 Valuatin Analysis: The Rle f the Expert in Litigatin In cmmercial litigatin the valuatin expert must balance varying methds and the use f judgment in delivering an ptimal result and then must be prepared t defend his wn valuatin while critiquing ppsing views. January, Stevens Creek Blvd., Suite 200, Cupertin, CA O F

2 Valuatin Analysis: The Rle f the Expert in Litigatin 2 Valuatin analysis is a frequent element f cmmercial disputes and litigatin. Valuatin prfessinals are ften called t serve as an expert witness in these cases. Whether the venue is Federal r State curt, r arbitratin prceeding, the expert witness must cnsider: The requirements f the curt cncerning the rle the expert is expected t play, the rules f evidence and prcedure the expert must fllw, and the standard f reliability and relevancy the wrk must satisfy; The expert witness shuld cnsider carefully the requirements and expectatins f the curt in which the dispute will be decided r arbitrated. The ethical and prfessinal respnsibilities t which the expert must adhere; The need fr effective cmmunicatin in the frm f written and ral testimny. Hwever, the key challenge fr an expert witness is that the practice f business valuatin has n single authritative surce fr established standards and analytical methds. The expert must apply and defend the use f judgment and estimates in determining the analytical apprach t be applied t each specific case. The expert witness must als be able t effectively critique the appraches, methdlgies, and assumptins used by the ppsing expert. Requirements f the Curt The expert witness shuld cnsider carefully the requirements and expectatins f the curt r ther venue in which the dispute may be decided r arbitrated. The expert s respnsibility is t the trier f fact, which may be the judge, arbitratr, r jury f the case. The expert is expected t be impartial with respect t the litigating parties. The expert is expected t be an advcate fr the reasnableness and reliability f his wrk. Hwever, the expert s rle is als t infrm the curt abut the principles and methds f valuatin and hw they shuld be applied t the facts f the case. The expert is expected t adhere t the rules f evidence and prcedures applicable t the case. 1 On a Federal level, the rules f evidence and prcedures generally require: The testimny must be based upn sufficient facts r data; the testimny is the prduct f reliable principles and methds; and the witness must have applied the principles and methds reliably t the facts f the case. Facts r data that wuld nrmally be inadmissible may be used if they are f a type reasnably relied upn by experts in the particular field in frming pinins r inferences upn the subject. 2 1 Federal Rules f Evidence, Rules ; Federal Rules f Civil Prcedure Rule Fr instance in United States v. Paracha, N. 03 Cr (SHS), 2006 WL (S.D.N.Y. Jan. 3, 2006), the use f alleged hearsay evidence was permitted by an expert wh defined his methdlgy as gathering multiple surces f infrmatin, including riginal and secndary surces, and ''evaluating new infrmatin t determine whether his cnclusins remain cnsnant with the mst reliable surces.'' Mere hearsay is inadmissible; the expert had t demnstrate that he applied his expertise t evaluate the reliability the evidence Stevens Creek Blvd., Suite 200, Cupertin, CA O F

3 Valuatin Analysis: The Rle f the Expert in Litigatin 3 The expert may pine n an issue the trier f fact will ultimately decide (e.g. the value f a business). The testimny shuld be submitted in the frm f a written reprt which includes: A cmplete statement f all pinins t be expressed with the basis and reasns fr each, The data and ther infrmatin cnsidered by the expert in frming expressed pinins, The qualificatins f the witness including all publicatins authred within the last ten years, and A listing f any ther cases in which the witness has testified within the preceding fur years. The expert is expected t base his r her testimny n sund methdlgy and t fit the methdlgy t the facts f the case. In Federal cases, the expert may be subject t a Daubert challenge in which the curt assesses the reliability and relevancy f the expert s testimny and may exclude the testimny if it is fund deficient. 3 A recent study by PricewaterhuseCpers survey fund that in % f the Daubert challenges t financial experts resulted in the exclusin f all r part f the expert s testimny. 4 State curt requirements are generally cnsistent with Federal curt requirements. Hwever, the expert witness shuld becme familiar with the specific rules and requirements f the venue at an early phase f the engagement. Ethical and Prfessinal Respnsibilities Ethical and prfessinal respnsibilities must guide all wrk and cnduct related t the case. The fundamental first three rules fr the expert witness are: Tell the Truth, Tell the Truth, Tell the Truth. Testimny shuld be ffered in the spirit f persnal integrity, gd faith, and sincerity. The expert shuld nt be invlved in matters in which these basic tenets cannt be maintained. The expert witness shuld avid ffering pinins n matters which are utside f the scpe fr which the witness has been retained. Nr shuld the expert ffer cnclusins f law. 3 In Daubert v. Merrill Dw Pharmaceuticals, 113 S. Ct (1993), the U.S. Supreme Curt gave discretin t judges t exclude testimny based n mere subjective belief r unsupprted speculatin. In Kumh Tire C. v Carmichael, 526 U.S. 137 (1999), the U.S. Supreme Curt extended this discretin t any expert testimny including financial testimny. 4 PricewaterhuseCpers Financial Expert Witness Daubert Challenge Study, August Stevens Creek Blvd., Suite 200, Cupertin, CA O F

4 Valuatin Analysis: The Rle f the Expert in Litigatin 4 The expert shuld be independent f his client in the case, and free f prfessinal r ethical cnflicts. Once the expert has an understanding f the case and the scpe f engagement, the expert shuld independently assess all relevant facts and evidence prvided by the client (r btained frm ther surces and parties). The expert s wrk and cnclusins shuld be develped independently. Due care in the preparatin and dcumentatin f wrk shuld be exercised. While the rules f evidence permit crrectins and revisins t testimny if necessary, errrs are embarrassing at a minimum and ppsing cunsel may attempt t use them t discredit the expert if the errrs appear t be particularly glaring r frequent. The expert s cmpensatin may nt be cntingent n the results f testimny. Cmpensatin may be based n prfessinal rates applied n an hurly basis and subject t retainer. In n event shuld testimny be presented t the curt if payment fr services is nt current. The expert witness may be affiliated with ne r mre prfessinal rganizatins which prmulgate ethical and prfessinal requirements such as the CFA Institute, the American Sciety f Appraisers (ASA), and the Natinal Assciatin f Certified Valuatin Analysts (NACVA). Overall, these rganizatins have issued guidance which represent a cherent and reasnable set f standards which can be applied t wrk filed in supprt f testimny. All wrk-prduct, including drafts, ntes and s may be discverable. While the ultimate determinatin f whether r nt materials are privileged is a legal cnclusin, ur practice is t retain cpies f such items in the event they must be prduced. Cmmunicatins Skills The expert must be able t cmmunicate the results and substance f his r her wrk thrugh ral and written testimny, and in respnse t adversarial examinatin by the ppsing party. The legal prcess depends n the careful and clear use f language t cnvey the cnclusins and explain the cntent f ne s analysis. The legal prcess is adversarial. The expert shuld be expected t make a psitive case fr the validity f his wrk and cnclusins. The expert shuld als be prepared t respnd t ppsing cunsel s questins and tactics. Accrdingly, the expert shuld seek t anticipate the questins that may be raised during ral testimny and cnsider ptential respnses in clear and cncise frm Stevens Creek Blvd., Suite 200, Cupertin, CA O F

5 Valuatin Analysis: The Rle f the Expert in Litigatin 5 Valuatin as a Specialized Field Valuatin is a specialized field which has evlved in respnse t develpments in law, taxatin, finance, accunting, and ecnmics. Prfessinal rganizatins have been established that prmulgate standards fr valuatin and prvide certificatin. There is a bdy f relevant case law. Hwever, there is n single authrity establishing apprpriate valuatin principles and methds. Instead, several general bservatins can be made cncerning practices that have garnered favrable results by the Federal Curts: The written valuatin reprt shuld be prepared based n the Unifrm Standards f Prfessinal Appraisal Practice (USPAP) business valuatin standards issued by the Appraisal Fundatin. 5 The USPAP standards, riginally published in 1987, have served as the basis f subsequent standards issued by the ASA, NACVA, and thers. The USPAP standards were updated in While there is nt an abslute requirement t fllw USPAP, the expert shuld be prepared t address the standards and justify the frm and extent f dcumentatin ultimately selected. If apprpriate, multiple valuatin appraches shuld be cnsidered and utilized. If the appraches prduce different results in value, there shuld be an analysis which recnciles the results f each apprach in supprt f the ultimate cnclusin f value. In cases where the expert values a cmpany as a ging cncern, the curts have generally expected the applicatin f the Incme Apprach, the Market Apprach, and the Asset Apprach. 6 The thery and implementatin f these appraches are all well dcumented in the valuatin literature. 7 The expert witness must have exercised reasnable validatin f the data and assumptins used in his analysis. Typically the data and assumptins used by the expert will be thrughly examined by ppsing cunsel wh can be expected t search fr unsupprted r unreliable data, assumptins, r any indicatin that the expert failed t cnsider all relevant facts. Valuatin analysis, hwever, ften relies upn assumptins and extraplatins cncerning future events and cnditins, r requires the analyst t exercise judgment, including: 5 USPAP Valuatin Standards N. 9 and N. 10 apply t business valuatin; Standards N. 1 thrugh 8 apply t real estate and persnal prperty. 6 The curts appear t expect that each apprach shuld be evaluated fr applicability t the case. The basis fr selecting the specific appraches used (and the basis fr rejecting thse nt used) shuld be dcumented in the reprt. 7 Fr instance see Shannn P. Pratt, Valuing a Business: The Analysis and Appraisal f Clsely Held Cmpanies (4 th Ed.) Stevens Creek Blvd., Suite 200, Cupertin, CA O F

6 Valuatin Analysis: The Rle f the Expert in Litigatin 6 The valuatin analysis may use management frecasts f the future perating results f a cmpany. The expert may exercise judgment in the selectin f public cmpanies and M&A transactins which can frm a basis f cmparisn fr the subject cmpany There can be the exercise f judgment in the determinatin f estimates f the cst f equity fr a cmpany, the apprpriate discunt fr lack f marketability that may apply t a subject interest, and ther variables relevant t the analysis. Cncluding Thughts Cmplex civil litigatin frequently requires reliance n valuatin prfessinals t prvide expert testimny. Successful testimny mandates a thrugh understanding f the requirements f the curt, a cmmitment t high ethical and prfessinal standards, clear and cncise cmmunicatin, and thrugh, wellsupprted analysis Stevens Creek Blvd., Suite 200, Cupertin, CA O F