Материал: Amy C Kläsener

@privlawlib

The Role of the Quantum Expert in M&A Disputes

assessment. Economic and financial analysis provides tools to understand how markets and commercial situations may have developed and translated into cash-flows. This involves analysing not just the outcomes, but also what drives those outcomes. From this understanding of the drivers, the quantum expert can infer on the outcomes in the but-for counterfactual world.

Two models, actual and but-for, are required to estimate the economic or financial harm. The modelling tries to explain complex interactions and behaviour. Invariably the model will depend on a combination of facts, assumptions, data availability, an appropriate methodology and a sound mathematical calculation.The facts and assumptions on which the calculation is based can be especially open to (1) individual interpretations, (2) different understandings, (3) errors and (4) different instructions.As such, the reliability of the modelling is a function of the strength of the methodology, the reasonableness of the variables and the input assumptions.

Often the damage or loss is tied to the effect on price paid or value assumed and being able to demonstrate this by reference to a financial model or calculation.There is no reason why the experts cannot be directed to meet and try to agree a financial loss model (or calculation). If such a model can be agreed, the tribunal will need only consider the major disputed assumptions that feed into the model.The submissions become far simpler: a list of alternative assumptions, together with each expert’s view, can be provided for the tribunal to consider and rule on. Once the tribunal reaches a view on the alternative assumptions, the experts (or even the tribunal with an easy-to-use, well-designed model) can insert these into the model and thereby have an assessment of loss.

As with all expert evidence, the tribunal is often reliant on the parties’ own appointed experts, their written reports, and the skill of the cross-examiners at the hearing.Valuation evidence tends to be relatively complex. By its nature, it draws together many threads running through other evidence, takes into account the various interplays and inter­ dependencies, and ultimately distils everything into one number. For those not used to dealing with valuation concepts regularly, it can be very difficult.

One additional way in which tribunals can consider the experts’ valuation evidence is through the use of expert conferencing, or hot-tubbing. In this way, the tribunal can ask its own questions (not that it cannot in any event) and explore together with the experts how the facts and assumptions feed into the calculations, the effects on value of the various claims, and where the differences lie between each expert’s evidence and why they differ. In our experience, expert conferencing when used by tribunals can be very useful: it moves the examination of expert evidence away from a potentially hostile cross-examination of each expert, to be much more of a dialogue between the tribunal and the experts. Having the experts give their evidence concurrently and under the control of the tribunal allows them to provide real-time clarifications and responses to each other, and for points to be conceded or agreed as they are discussed. Seeing both experts together is also a useful way for the tribunal to test whether either expert is taking an unreasonable or unsustainable position.

We do not want to overlook the use of a single joint expert. This might suggest cost-efficiencies, but it can be difficult for agreement to be reached on appointment, and there are often procedural difficulties around instructions, scope of work, the information provided to the expert, and how the expert interacts with the parties if he or she needs

75

© 2020 Law Business Research Ltd

@privlawlib

The Role of the Quantum Expert in M&A Disputes

more information or instruction.The use of a single expert also means his or her evidence is less likely to be challenged, and absent alternative expert opinions or evidence it can be difficult for the tribunal to move away from the evidence if it wanted to.This is particularly important in valuation work where the assumptions and calculations can be subjective, and where the issues can be complex.To address this, we often see parties appointing their own expert as an adviser, negating any cost benefit.

We have also seen cases where the tribunal asked the parties for permission to appoint its own expert to assist them in the valuation aspects – not as a witness, but as a behind-the- scenes adviser.This is especially useful in the larger and more complex valuation cases. Such advisers are themselves usually people who have acted as expert witnesses and so are fully used to the arbitral process.The expert adviser can help the tribunal to focus on the key aspects of the valuation evidence, and can be of real assistance in cases where the valuation aspects are particularly challenging and require deep technical expertise.4

The presentation of expert evidence

No one will disagree that expertise and experience are important for any quantum expert. But equally important is the ability to communicate and present evidence both written and oral to the tribunal.

Ahead of any hearing, the mainstay of expert evidence on quantum has been and remains the written report.With an expert for each party, this often runs to the rigid process of first reports and reply reports, and, depending on the arbitral institutions and the arbitrators, may include joint meetings and joint statements or further reports.We are also seeing experts being asked to meet ahead of preparing their reports, to agree information requirements, input assumptions and valuation methodologies, with a view to narrowing issues (and saving costs) ahead of initial reports.

When it comes to the expert’s evidence, there is much talk about alternative methods of giving evidence, such as presentations, videos and animations. But there will be no getting away from written reports for the foreseeable future.The question is how to make written evidence more effective.We should not forget its primary purpose – to support the tribunal in matters outside of its own expertise.The expert and his or her evidence must be, of course, compelling, but also accessible. In written reports, based on our experience, a mix of written and visual evidence is powerful. Just as pictures speak a thousand words so graphs speak a thousand numbers. Graphs and diagrams, done well, make complex data accessible and intelligible.There is a balance to be struck here; graphs and diagrams must be relevant to the issues at hand and be part of the expert’s discussion. But they can also help to focus in quickly on what really matters in a dispute and what is actually peripheral.

When it comes to presenting evidence before a tribunal, there are many ways to make that evidence memorable and educational. Each person understands best in a different way

– some understand best through reading, some through seeing, some through hearing and some through experiencing.The arbitral hearing is the first time that an expert can give evidence orally. More recently, hot-tubbing or expert conferencing has been used more frequently by tribunals to hear expert evidence, sometimes in place of cross-examination,

4 This is a relatively unusual solution but one that one of the authors has close experience of.

76

© 2020 Law Business Research Ltd

@privlawlib

The Role of the Quantum Expert in M&A Disputes

sometimes in addition to it. As we discussed above, it is a useful way for the tribunal to hear directly from the experts on the differences between them, and may also be a forum in which the experts can reach consensus.We are seeing more use of presentations, where the experts are each given time to summarise their reports and identify the key aspects and differentiators for the tribunal. Being able to present well is becoming more important for the quantum expert. Today, the technology exists for more interactive presentations, and in some cases it may be possible to use visualisation tools to help demonstrate the effect of assumptions and inputs dynamically, which allows for the tribunal to comment and even contribute during the presentation.

Conclusion

M&A disputes, much more than commercial disputes, require quantum experts with expertise in multiple areas.This could include technical disciplines – accountancy, investigation and valuation – and it is not uncommon to need a quantum expert skilled in two, or even all three, of these disciplines. In addition, the quantum expert may need to understand the requirements and mechanics of due diligence exercises and in undertaking transactions. There is rarely an expert that can cover everything, so identifying the key areas is important for the efficiency of a case, and sometimes there is a careful balance to be struck.

Each discipline has its place: accountancy expertise is often at the core of a case; investigative expertise is required in determining if there has been a breach and then what the causes leading to damage might be; and valuation expertise will be needed to ultimately assess the effect on value and price, and so the losses suffered.While accounting issues are the basis for many M&A disputes, more often than not a pure accounting specialisation is insufficient for the quantum expert. In many instances, an investigation in the accounting records and business plan preparation process with particular attention to key reference dates is needed. A development of a factual matrix and a chronology of events will undoubtedly require a forensic IT exercise. We see new investigative IT systems, which present unstructured and structured data alongside one another in a single application. They make it easier to detect and communicate relationships and causation, especially in instances with numerous transactions. Moreover, data visualisations are becoming a powerful tool for exploring and explaining such relationships to the tribunal.

There are many techniques and tools that can be employed by the quantum expert in assisting clients, and the tribunal, in the resolution of M&A disputes.The role an expert can play is not just that of expert witness: experts can act as adviser to a party or even as adviser to the tribunal. Experts mandated to act as adviser are well placed to provide assistance and add value throughout the deal cycle.

Finally, when it comes to presenting evidence before the arbitral tribunal, the tried and tested written report is being supplemented by new ways of presenting evidence. Recognising how people understand – visually using graphics, aurally through presentations at the hearing, even tactilely through the tribunal exploring expert evidence and analysis – can in turn help to create compelling, but accessible, expert evidence.

77

© 2020 Law Business Research Ltd

@privlawlib

7

Managing Expert Determinations

Gerald M Hansen1

This Guide focuses primarily on various aspects of the resolution of M&A disputes through arbitration. A formal arbitration process, however, is not the only method of resolving certain M&A disputes. An expert determination is an additional alternative dispute resolution process often included in transaction agreements, one that is commonly utilised in resolving post-closing purchase price adjustment disputes.This chapter will discuss a variety of topics focused on assisting transaction parties, their advisors and their counsel in managing the expert determination process, including how an expert determination differs from an arbitration and the types of M&A disputes that are most often appropriately resolved through an expert determination.This chapter will also discuss and describe a variety of factors related to expert determinations, including, defining and documenting the process in the relevant transaction agreement; items to include in submissions to the expert that can have a direct impact on the determination; and the critically important selection of the expert.

Expert determination versus arbitration

Before discussing how to manage the process, we should differentiate between an expert determination and an arbitration. While the processes can appear similar because quite often the two can be procedurally very similar, there are some key differences and considerations for transaction parties opting for this forum of dispute resolution.

There are two primary differences between arbitrations and expert determinations.The first is that an expert determination is most commonly conducted and provided by a single expert, commonly an accounting or other industry expert, whereas many arbitrations involve an arbitral tribunal comprising attorneys.The second key difference is that, generally speaking, there are no formal rules governing an expert determination other than what may be provided for in the transaction agreement (or otherwise agreed between the parties

1 Gerald (Jerry) M Hansen is a partner at Forensic Risk Alliance.

78

© 2020 Law Business Research Ltd

@privlawlib

Managing Expert Determinations

and possibly the expert), other than licensing standards for professional certifications held by the expert. By contrast, arbitrations are governed by a variety of rules, laws and treaties that can apply depending on the venue or the parties’ agreement.

These differences are important to be aware of when selecting the dispute resolution process to include in transaction agreements.There are different types of M&A disputes, some of which are best served by arbitration, others by expert determination.This is why many transaction agreements contain both dispute resolution methods, with each applicable to different disputes. (See Chapter 3 on conflicts between expert determination and arbitration clauses.)

Types of disputes frequently resolved through expert determinations

M&A disputes relate to a variety of transaction provisions, such as representations and warranties, indemnities, transaction fraud, leakage, and purchase price adjustments. Not all M&A disputes are appropriate for expert determination. In addition, there is a marked difference between an expert who determines an M&A dispute and a quantum expert or other subject-matter expert witnesses.This chapter is only concerned with the expert determination, not other experts that may be retained to assist a party in presenting its position in the arbitration or expert determination.

Expert determinations are commonly provided for in transaction agreements to resolve post-closing purchase price adjustment disputes. Such disputes are also referred to as net working capital disputes, closing accounts disputes or completion accounts disputes. Many transaction agreements contain post-closing purchase price adjustment mechanisms based on a pre-determined metric – commonly net working capital – but it could be some other metric, such as EBIT.2

How a purchase price adjustment dispute can arise is based on the provisions of the transaction agreement. Most agreements with purchase price adjustment provisions allow a buyer to review the acquired entity and propose adjustments to the price if the buyer believes certain financial statement items (e.g., net working capital items) reflected at the closing date are not representative of the actual amounts received or are otherwise recorded contrary to the applicable accounting guidance (e.g., in violation of IFRS or US GAAP).3 The types of items most commonly at issue are those requiring some level of estimation or subjective judgement on the part of management, which allows for differences of opinion. Examples of such items would include allowance for doubtful accounts, inventory reserves, warranty reserves, contingent liabilities and similar accounts. If the seller disagrees with the buyer’s proposed adjustments, the parties may negotiate and settle their differences, or the disagreement may persist, resulting in a contractually agreed dispute resolution process, typically an expert determination.

Outside the United States there can be a perception that contractually provided for purchase price adjustments and resulting disputes have decreased in frequency.This is because the use of locked-box transactions to avoid purchase price adjustment calculations and disputes is increasingly common in the United Kingdom and some other European countries. Locked-box transactions commonly establish the purchase price based on a review of

2Earnings before interest and tax.

3International Financial Reporting Standards; US Generally Accepted Accounting Principles.

79

© 2020 Law Business Research Ltd