A year-and-a-half ago, on June 5, 2018, I wrote “A Valuation Expert in Business Divorce Litigation Can Help Early On” about the value of retaining a valuation expert early on. Knowing what your shares may be worth can be an invaluable tool when approaching negotiations relating to being paid for those shares, or in determining whether or not shareholder dispute litigation may be cost-effective.
However, the method of retaining a valuation expert can be just as important as the fact that you have one.
Ideally, the expert should be retained by your attorney, not by you. First of all, you want to make sure the expert is good at testifying, not simply good at valuing a company. Moreover, if you retain your own expert, conversations that you and your attorney have with that expert are not privileged. If your attorney retains the expert, on the other hand, then she is an agent of the attorney. If the conversations that you have with the expert are had in the presence of your attorney, then those conversations are privileged and cannot be disclosed or discovered in any eventual litigation.
This is not a theoretical issue, as it can have dire real-world consequences if not done right. In one case several years ago, the adverse party hired his own appraiser in a fraudulent conveyance action. Therefore, when I served a subpoena on that expert, I was able to obtain discovery relating to conversations between the client and his appraiser. When I received the appraiser’s notes, they indicated that the expert had spoken with the adverse client who “wants low value – wants value around $700,000.” We were arguing that the property was worth much more (thus making the transfer from his company to himself a fraudulent transfer). Guess what value the expert came up with? Of course, he just happened to opine that the property was worth $700,000, exactly the number that the other side had asked for!
As a result, the appraiser had zero credibility and the other side had no choice but to capitulate and settle. All because the client took matters into his own hands and hired an appraiser without consulting an attorney first.
The above happened in a fraudulent conveyance case, but the exact same principles would apply to a business divorce litigation.
You need valuation guidance as early as you can get it, but it must be done in a way that does not weaken your case if business divorce litigation ensues.
The worst result would be having to hire a second expert for the litigation phase in the event the case does not settle. So, while retaining an expert for guidance early on is often a good idea, please make sure it is done the right way. Otherwise, you will just be creating a problem for yourself down the road.
If you have any questions about this post, shareholder disputes, or any other related business law matters, please feel free to contact me at email@example.com.