Good news from Ontario appellate court over expert draft reports
When a Canadian trial court decided last year to strictly control the interaction between experts and counsel and compel production of draft reports, business valuators mobilized. Together with lawyer associations, they supported the ensuing appeal. The Court of Appeal’s newly released decision is cause for cheer.
Stop the collaboration: In a medical malpractice case, the Ontario Superior Court of Justice examined the admissibility of expert evidence under Rule 53.03 of the Ontario Rules of Civil Procedure. It said that a 2010 amendment to the rules had been specifically aimed at counteracting the “hired gun approach” and ensuring the expert witness’s independence and integrity. As the superior (trial) court saw it:
The expert’s primary duty is to assist the court. In light of this change in the role of the expert witness, I conclude that counsel’s prior practice of reviewing draft reports should stop. Discussions or meetings between counsel and an expert to review and shape a draft expert report are no longer acceptable.
The court went on to say that “if after submitting the final expert report, counsel believes that there is need for clarification or amplification, any input whatsoever from counsel should be in writing and should be disclosed to opposing counsel.”
The opinion generated a wave of criticism from the legal profession and the community of expert witnesses. The Canadian Institute of Chartered Business Valuators and the Advocates’ Society were among the six groups that intervened in the appeal.
Bad policy: The Ontario Court of Appeal sided with the challengers. It disagreed with the trial court’s proclamation that the 2010 amendment introduced a “change in the role of expert witnesses.” It did not create new duties for expert witnesses, the reviewing court said. Even though some judges have voiced concern about the impartiality of expert testimony, “banning undocumented discussions between counsel and expert witnesses or mandating disclosure of all written communications is unsupported by and contrary to existing authority.” The most effective way to expose “partisan expert evidence” is the use of cross-examination, the appeals court noted.
It agreed with the “interveners” that proscribing interaction between counsel and expert witnesses made for bad policy. “Just as lawyers and judges need the input of experts, so too do expert witnesses need the assistance of lawyers in framing their reports in a way that is comprehensible and responsive to pertinent legal issues in a case.” Attorneys need to make sure the expert understands critical legal concepts, such as who has the burden of proof and “scientific certainty,” and that the report conforms to the applicable rules of civil procedure, the appeals court pointed out.
The trial court’s approach would increase delay and cost, the Court of Appeal added. Attorneys would resort to “shadow experts” for advice and would opt to destroy draft reports that could be improved through editing. If anything, precluding collaboration would provide an incentive for using “hired guns” because the latter might require less guidance and preparation.
The appellate decision spells victory for experts, but it did not change the outcome of the case. The trial court’s evidentiary errors did not result in a miscarriage of justice, the appeals court concluded. It refused to order a new trial.
Takeaway: Even though this opinion carries no weight in U.S. courts, it merits attention from practitioners in this country. In addition to discussing the discovery rules applicable to draft expert reports, the Ontario appeals court provides a rationale for why mandatory disclosure and production of drafts has a negative effect on a party’s case and on judicial proceedings.
Find an extended discussion of Moore v. Getahun, 2015 ONCA 55 (Jan. 29, 2014) in the March edition of Business Valuation Update. The court’s opinion will appear soon at BVLaw. For prior coverage of the case, click here.
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Engagement letters as a professional liability shield
Exposure to a professional liability claim can be limited by using the engagement letter to establish clear expectations for the valuation work to be performed, according to an article in the AICPA’s FVS News. This technique, however, may not limit liability if the dispute ends up in court. Therefore, the engagement letter should also provide for mediation or arbitration as an alternative to court for handling disputes. “Compared to a jury, arbitrators might have a better appreciation for the nuances of valuation work,” which could be more favorable to the practitioner, says the article.
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Fee pressures, methodology challenges to continue, say BV experts
In prior issues of BVWire, we presented thoughts from some members of the editorial advisory board of BVR’s Business Valuation Update. Here are a few more comments on the past year and the rest of 2015.
Fees and services: “As a maturing industry, valuation services have become increasingly commoditized,” observes Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC). “As more people have considered the profession as a career choice, there has been continued downward pressure on fees. At times I’ve wondered if we will ultimately be paying the clients for the chance to do the work.”
Rod Burkert (Burkert Valuation Advisors LLC) weighs in on the fee issue: “I believe fee compression will continue to be a concern, especially for practitioners who don't differentiate themselves by specializing in a niche and whose deliverable is ‘just’ a report.” BVWire notes that Burkert is a co-developer of the Practice Builder Academy, which is designed to help BV practitioners attract more work.
Other developments affecting fees are changes in GAAP for private companies that have also changed the need for fair value work, according to Yeanoplos. “As a result, the pool of companies requiring valuation of intangibles has diminished, putting the brakes on this area somewhat as an area of practice growth.” He also points out that, because of fundamental economic changes over the past six years, “more divorce attorneys are attempting to settle their cases without having a formal valuation done, thereby reducing overall fees.” He points out that valuation experts “have been forced to consider innovative ways to provide value to clients, such as strategic planning.”
Another way BV experts can provide value to clients is to help business owners understand value and help them see how they can tap into that value. “Interest in the BV arena has been keen on this topic, since it provides a different way of talking to business owners and a means of enhancing the relevance of what we do in the private wealth planning process,” says Z. Christopher Mercer (Mercer Capital). Mercer is the author of a new book, Unlocking Private Company Wealth, which is designed to help you help business owners manage the wealth they create in their private business and understand how to talk to them in this regard.
Methodologies: “From the perspective of someone who primarily values smaller businesses, I don't think a lot happened in 2014 in that regard,” says Burkert. However, BVWire points out that Burkert is a co-developer of the new implied private company pricing line/model (IPCPL/IPCPM), which is designed to be a more reliable way of estimating the cost of capital of small private firms. Yeanoplos says IPCPL is a “step in the right direction” with regard to the profession’s “seemingly fruitless search for the ‘holy grail,’ that is, the elusive method to precisely quantify the company specific risk premium. It strikes me as the ‘illusion of precision.’” Despite advances, “there are still so many leaps of faith that I’m not sure we’re better off than we were,” he says.
Burkert sees a continued questioning of standard practices and conventional wisdom. “For example, does the size premium still exist? And assuming it does, does it overlap with the discount for lack of marketability?”
Aging of the profession: The business valuation profession is aging. Mercer points out that statistics from the American Society of Appraisers indicate that the average age of appraisers is rising each year. This phenomenon indicates transitions are going on in many individual careers as well as at many firms. “The aging of this group should create substantial opportunity for younger appraisers who take the time and make the effort to build their careers,” notes Mercer.
However, there’s trouble finding people to fill the void, observes Yeanoplos. “The profession's thought leaders are struggling to hand off to the next generation,” he says. “I have some real concerns about the direction of the profession."
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‘Appraisal arbitrage’ gains steam
In last week’s BVWire, we covered a recent court ruling involving Dole Foods and a technique known as “appraisal arbitrage.” This strategy involves acquiring stock in a company that’s a takeover target. Then, the investors try to squeeze more money from the buyers by opposing the takeover and petitioning the court for a fair value appraisal.
According to a report in The Wall Street Journal, this technique has gained popularity, with a “record 33 appraisal claims stemming from public-company takeovers … filed last year in Delaware.” Expect to see more of this, according to Kevin Abrams, a lawyer for Merion Capital LP, which has $750 million tied up in pending lawsuits. “Sophisticated investors are seeing significant valuation gaps in certain deal prices,” he told WSJ.
The report also cites research from law firm Fish & Richardson PC finding that about 81% of Delaware appraisals that went to trial since 1993 have yielded higher prices.
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Pratt’s Stats hall of famers for 2014
With the help of business intermediaries who submit deal information, Pratt’s Stats continues to be the leading private-company merger and acquisition (M&A) transaction database. BVR has created the Pratt’s Stats Hall of Fame to thank those intermediaries who have contributed the most transactions. For 2014, they are:
- Paul Chambliss, Front Range Business Inc. (Boulder, Colo.);
- Ronald Chernak, First Business Brokers Ltd. (Colorado Springs, Colo.);
- Jim DeShayes, Colorado Business Exchange (Fort Collins, Colo.); and
- Mark Doran, Choice Business Opportunities Ltd. (Denver).
Sincere thanks to these and all of the individuals who have helped BVR build Pratt’s Stats into the trusted and reliable data source that it is today.
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BV movers . . .
People: Scott Beauchene was promoted to valuation managing director in Andersen Tax’s Seattle office … Tom Bondi, Larry Kuechler, Roberto Maragoni, Frank Minuti, Dan Moors, Randy Peterson, Todd Robinson, Robert Smiley, and David Sheets have joined the California firm Armanino as partners after its merger with Berger Lewis Accountancy Corp. … Roger Grabowski, managing director with Duff & Phelps LLC of Chicago, recently was admitted as a charter member of the American Academy of Matrimonial Lawyers (AAML) Foundation’s Forensic & Business Valuation Division, an elite group of 28 charter members from across the U.S. selected on the basis of their national reputation and achievements in business valuation, litigation support, and forensic accounting; their history of serving AAML members and their clients in complex financial matters during divorce proceedings; and their commitment to integrity in this process … Chris Lovin was named partner-in-charge of the litigation and valuation services division at the Brentwood, Tenn., firm Lattimore, Black, Morgan & Cain (LBMC) and succeeds David Wood, who is retiring from the role … Billy Moore will take over the role of chief financial officer at Grant Thornton LLP, starting August 1, and will succeed Russ Wieman, who is retiring … Charles Price, interrogation expert and decorated FBI agent, has been appointed managing director at MorganFranklin Consulting of McLean, Va. … David Simon was named member at Weltman Bernfield LLC of Buffalo Grove, Ill.
Firms: The Mumbai-based Desai Haribhakti Consultants has joined the network of Baker Tilly International … Duff & Phelps Corp. has signed a definitive agreement to acquire American Appraisal Associates Inc., a global full-service valuation and fixed asset management advisor … The Surat, India, firm Natvarlal Vepari & Co. is the latest firm to join BKR International.
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Buy-sell agreements top list of upcoming CPE events
Valuation professionals have an important opportunity to assist clients with administering or litigating ownership agreements. Mark your calendar for February 12, when BVR presents a webinar, Buy-Sell Agreements, featuring Brian Burns and Chris Mitchell (both with Dixon Hughes Goodman). They will focus on the valuation implications of buy-sell agreements, including factors that influence value and selecting the method to determine the purchase price. The speakers will also discuss how the courts view buy-sell agreement disputes, and they will give practical examples of disputes and eventual outcomes.
Other upcoming webinars of interest:
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