How can discovering self-serving expert opinions help in squeeze-out litigations?
Litigations over the fair value of “squeezed-out” shares of minority shareholders generate large amounts of information relevant to company valuations. The objective of squeeze-out litigations is to define the fair compensation (which is done by the court), which is usually based on the estimate of the fair value (which is done by experts). Expert opinions, therefore, play an essential role in such litigations. What information can be found in publicly available court judgments? How can this information be used in practice by attorneys, experts and other parties to the disputes?
What information do publicly available judgments on squeeze-outs offer?
- Opinions of parties to the dispute. The grounds of court judgments include a description of facts and evidence considered by the court when forming its judgment, and as such also the description of both parties’ arguments. These often do not overlap with expert opinions but present a standalone complex line of argumentation. The key person forming them is the counsel, sometimes working alongside an expert (economic) advisor. Court judgments capture the development of the discussion, i.e., they mention successively presented arguments and counterarguments.
- Expert opinions. In the grounds of court judgments, we can also find a summary of expert opinions – be it in the form of their assessment, expert statements, or hearings. Additionally, we can learn who hired the services of a given expert.
- Court opinion. According to established case law, courts primarily judge issues that are legal, not expert, in nature. It is, however, not black and white. In its judgment (File no. III ÚS 647/15 dated 27 November 2018, paragraph 32), the Constitutional Court stated that “the issues addressed, usually the economic ones, are not always of such expert level for the judge (…) to be unable to identify possible errors in the expert opinion, and subsequently verify and remove them as per procedural law.” Either way, courts must deal with individual arguments (principally expert opinions) and document the process in their judgments. In grounds for judgments, we can see non-controversial common practice along with rather emphatic judgments or factual (expert) assessments that can be considered erroneous.
- Established case law. High Court and Constitutional Court judgments form established case law for the judicial system that is also relevant to experts (for example, the definition of fair share price, the applicability of the discount for limited negotiability etc.)
Considering the extent and complexity of the valuation process, publicly available court judgments present only a brief source of information that can be inaccurate to a varying degree. When studying the whole file, which is not public, however, the complexity of the whole dispute comes to light.
If we use court judgments to create an overview of who stated what in relation to which (valuation) topic, we get an overview of
- which valuation topics are the subject of disputes most often,
- which arguments are typically used for reasoning in relation to a given method (by experts and parties to the dispute) and which arguments “win”,
- what is the success rate of experts through an objective lens (whether the court based its judgment on the opinion or not) and a subjective lens (in terms of the verbal assessment of the court and parties),
- which areas contain methodological inadequacies.
The subsequent linking of information from court judgments to a database of expert opinions can give a relatively clear idea of individual experts’ usual and extraordinary methods, possibly proving their procedures as self-serving or erroneous. Such information can be used by attorneys, experts, frequent participants of the disputes, and experts who help cultivate the valuation practice. Information on the consistency of expert agencies presents a certain sign of quality, and so they should be a natural subject of interest of all those who assess judgments.
Based on recent judgments, it can be said that these topics especially were among the most frequent subjects of discussions:
- valuation based on the share price on the stock exchange and private transactions with the company’s shares,
- size surcharge on the estimate of the cost of equity (discount rate),
- date of valuation,
- distinction between legal and expert issues, financial plan and terminal value or value standard.
For frequent dispute topics, we at Deloitte also record which party used a given argument and how the court evaluated them. Our Financial Advisory Team has been using this database for a long time, especially to check whether an expert opinion shows elements of self-serving argumentation (that is, signs of such methods and assumptions that are unusual for the standard practice of the expert in question). At the same time, we get a more general overview of valuation methods used in the Czech environment.
Findings acquired from court disputes may help develop the valuation practice in the Czech Republic
Based on the above information and our experience, it can be said that (in the case of participation of relevant experts) a highly expert discussion takes place that often delves into great detail and pushes the boundaries of knowledge in valuation. Unfortunately, from the point of view of a more general valuation community, it is also true that the documents in which the expert discussions are presented (expert opinions, expert statements) are not publicly available and so many interesting but also methodologically completely erroneous lines of reasoning rest forgotten in the files. Parties to the dispute, experts, and other advisors typically lack the motivation to present the expert discussion publicly due to non-disclosure agreements, conflict of interest, a lack of time or other reasons. From the point of view of developing the knowledge in valuation, it is undoubtedly a missed opportunity – more publicity would support correct innovative valuation approaches (which could be developed further by the expert community). It would also help eliminate erroneous methods as the valuation community would refuse them, so they would not be re-used in other disputes.