The third way
Andrew Maclay, Forensic Accounting Director at BDO, reports:
Expert determinations sometimes seem to be the poor relation of litigation and ADR – but arguably they are the cheapest, fastest and most efficient way of resolving certain classes of disputes. As forensic accountants, we get involved in them primarily in two types of disputes –
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• Post Closing working capital disputes, when the parties to a Sale and Purchase Agreement (SPA) have been unable to agree the Closing Balance Sheet or earnout to the vendors; and
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• Valuation disputes, either on behalf of a minority shareholder or in the context of the dissolution of a joint venture.
A seminar I attended recently at the IBA conference in Dubai acknowledged their existence and the fact that the corporate teams of law firms generally put them into sale and purchase contracts – but the global litigators present seemed far keener on using arbitration to resolve disputes. However, we all know that arbitration can be longwinded and the arbitrators may not be able to understand the accounting detail of the dispute.
So, what are the advantages of expert determination in an SPA or valuation dispute? It seems to me that they include:
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• Accountants are able to understand and apply UK GAAP or IFRS which are the basis for company accounting
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• Accountants are used to questions of how controversial items should be treated in a set of accounts
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• Accountants are used to the concepts of “true and fair” and materiality that are fundamental to a set of accountants
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• Accountants are used to valuing companies and parts of companies, both in the real world for M&A purposes and for the purpose of company balance sheets
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• Accountants are used to Discounted Cash Flow calculations and determining discount rates and Weighted Average Cost of Capital
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• The timetable and process is controlled by the expert, and consequently is more flexible and generally quicker than a court or arbitration process
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• Oral hearings are generally avoided, saving costs, although they are available for any party who wants “its day in court”
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• The determination by the expert is generally final and unappealable, at least in the UK, save in the case of manifest error or fraud
Lawyers may feel uneasy about expert determinations because they are excluded from the process and because in many cases the expert determination is non-reasoned, so that the parties have no visibility of why they won or lost or of the expert’s thought process and it is difficult to appeal. In overseas jurisdictions, it has been put to me that the lack of reasons may be a breach of natural justice.
However, the other side of these arguments are that the client gets a robust, clear determination fast and the lack of appealability gives certainty. In any event, it is possible to ask for a reasoned determination (which may cost more and take longer) – and lawyers can be involved in drafting the submissions and in advising their client on strategy. However, even then, it can be useful to involve an accountant in preparing the submissions as he is likely to understand the issues better and to know how the expert will go about his task.
Another criticism is that the accounting expert may end up determining points of law. On this point, expert determination is best used when accounting issues are those in dispute in an SPA, rather than legal points – however, there is nothing to stop an accounting expert seeking legal advice if legal issues have got caught up in his determination.
In closing, expert determinations are a valuable part of Alternative Dispute Resolution, and should be used more by companies – particularly as practitioners criticise arbitration for costing too much and taking too long.
