Being single does not make you right

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The Supreme Court of New South Wales finds that an expert appointed jointly by the parties does not have the presumptive advantage of additional independence over an expert appointed by one of the parties. This Expert Postcard looks at the Court’s approach when confronted with differing opinions between a single expert and a party expert.  

In the matter of OTS (Australia) Pty Ltd [2017] NSWSC 175

No additional weight or significance to single expert

This was a shareholder oppression suit between three founding directors. The plaintiff owned two of the six issued shares and the defendants owned the remaining four.

The parties agreed to appoint a single valuer (Single Expert) for the purpose of determining the value of the plaintiff’s shareholding. After the Single Expert delivered his valuation report, the Court granted the defendants leave to adduce expert evidence in response to the Single Expert’s valuation (Defendant’s Expert).

Both Experts were directed by the Court to confer and prepare a joint report where their fundamental disagreements were identified as:

  • whether cash held by OTS should be treated as surplus cash and added to enterprise value (EV). The Defendant’s Expert was of the view it was not surplus and the Single Expert was of the contrary view.
  • the appropriate EBITDA multiple for the EV/EBITDA approach. The Defendant’s Expert used an adjusted FY15 EBITDA of $563,400 to which she applied a multiple of 4.0x to 5.0x, the Single Expert adopted a longer-term projected EBITDA of $336,000 to $350,000 and a multiple of 7.5x to 8.5x.
  • whether the EV/Revenue methodology (favoured by the Single Expert) or EV/EBITDA methodology (favoured by the Defendant’s Expert) was the more appropriate.

The plaintiff contended that where there was disagreement between the experts, the Single Expert has the presumptive advantage of the additional degree of independence. The Court disagreed and found that:

“While I accept that the manner of appointment of a parties’ single expert means that he or she owes allegiance to neither party, that of itself does not enhance the quality and reliability of the opinion, although it deprives its critics of one potential criticism. But the opinion of the single expert, when it is challenged or contradicted, must be scrutinised and evaluated just as is the opinion of an expert instructed by only one party.”

On the areas of disagreement, the Court was ultimately guided by the expert evidence but did not entirely adopt the evidence of either expert:

  • on cash, the Court disagreed with the Single Expert’s classification and the Defendant’s expert’s proposed treatment and found that it should be added back on the basis that but for the oppression, the plaintiff would have received one-third of it.
  • on EBITDA, the Court found the Single Expert’s approach to be erroneous and the Defendant’s Expert’s approach to be overly conservative.
  • on the EBITDA Multiple, the Court preferred the evidence of the Defendant’s Expert, which was derived from research focused on companies more comparable to OTS.
  • on a revenue versus earnings approach, the Court was not persuaded to change its primary methodology, but did find that the EV/Revenue approach demonstrated that the EV/EBITDA approach produced a conservative result and should be taken into account as a check. 

Lessons learnt

Courts will assess the merits of expert reports based on the quality and reliability of the expert’s opinions, not necessarily by reference to whether an expert was appointed by one or both litigants.

It is not uncommon for Courts to adjust the expert’s findings to arrive at an outcome that is guided by expert evidence, adapted to reflect the factual circumstances of the case.

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SOURCES: 1 Brereton J at [17]

 

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