Practice - April 2007

Valuation Evidence: What’s it worth?  

Sale and Purchase Disputes: It Could Get Scary Out There...

Equal Opportunities: 'tis the season...

Equal Opportunities: The Equalities Review publishes its Final Report

An Open Letter to Andrew Holroyd – Vice-President of the Law Society

Valuation Evidence: What’s it worth?  (TOP)

Independent and robust valuations are critical to the resolution of many disputes and disagreements, from shareholder disputes to matrimonial cases. Geoff Mesher, Head of KPMG Forensic in the South and Eastern Counties, considers the importance of professional valuation advice in helping the proceedings to reach a fair and hopefully acceptable conclusion.

When and where do you need someone to independently value shares, companies or businesses?

The short answer is that a sound, objective valuation is needed for the purpose of resolving many disputes. Who is appointed to do this, and how they are instructed, are both critical to the success of the valuation process. There are a number of contentious situations in which valuation advice or evidence can be fundamental:

1. Valuations under Articles of Association or Shareholders Agreements.

2. Joint venture disputes.

3. Compulsory purchase orders.

4. Offer to shareholders.

5. Shareholder disputes under s459 Companies Act 1985.

6. Matrimonial disputes.

7. Compensation or damages in, for example, breach of contract proceedings.

Who should you appoint?

A valuer may be appointed to fulfil a number of roles from that of independent valuer (to determine a valuation on the parties), through expert witness (perhaps a single joint expert), to professional advisers (to assist clients and their legal advisers to understand the valuation issues and likely quantum).

Valuations should only be carried out by those who have the requisite skills and experience. Crucially, the appointment of a valuation professional should not be confined to ‘big ticket’ cases; the amounts at stake in a case involving shares in a small or medium-sized company are just as important to the parties involved as for those of a large blue chip plc. A valuation undertaken by someone with little or no theoretical knowledge and practical experience can waste time and money. It can also lead to the deterioration of relations between the parties and make resolving the dispute more time consuming, costly and complex.

This can be illustrated in a recent case in which KPMG in the UK was involved, regarding valuation of the shares of a director who had left the company. Initially, the company employed accountants with little valuation experience (without consulting the ex-director) and made an offer to acquire the shares based on their valuation. The ex-director rejected the offer on the basis that it was not produced by an independent valuer and that he had no opportunity to present his views. An experienced valuation team from KPMG in the UK is now doing the valuation. Apart from the first valuation being a waste of the company’s money, it has had the effect of moving the attitude of the parties from a disagreement on value to a full-blown dispute, with high levels of distrust now existing between the parties.

Independence of the valuer

This is essential to the credibility of the valuation when acting as single joint expert, as expert witness or as independent valuer.

Valuers will use information provided to them by one or both of the parties, which will typically include historic facts accepted by both sides as well as an element of subjective material such as budgets, business plans and forecasts. Whilst legal teams will naturally advocate views advantageous to their clients’ case, the valuer must never allow any ‘spin’ or pressure to impact on their duty to provide independent expert evidence.

It is worth remembering that an expert witness needs to be able to state in court that the opinions in their report would have been the same whichever party had appointed them.

Even when acting as advisor to one side in a dispute, a valuer should retain an objective perspective, and provide a realistic assessment of the case, supported by evidence, to both their client and their legal advisers.

Conclusion

The value of shares or business assets is often at the heart of a dispute and is therefore of great importance to the parties involved. It follows that the appointment of an independent valuer or expert witness should be a decision taken with great care. The valuation process, and ultimately the resolution of the dispute, can be made far smoother with the agreement of the parties in advance; a clear understanding of the role of the valuer in the process; and, the appointment of the right individual.

Sale and Purchase Disputes: It Could Get Scary Out There...  (TOP)

Summary

The UK corporate merger and acquisition market is substantial. The prices being paid for the best companies are increasing, and worryingly, more debt is being used to fund the purchases. Any downturn in the world economy and/or significant increase in interest levels could lead to an unprecedented increase in corporate acquisition disputes. An area that is already fertile to dispute.

Substantial level of activity

The last five years have seen an enormous level of company merger and acquisition activity. According to Thomson Financial, total deal value in the under £100 million deal size category totals some £100,000 million.

CORPORATE PRESSURE COOKER

The last five years have also seen the venture capital market come of age, and increasing volumes of money being ploughed into this sector. There has also been significant growth in the nature and complexity of financial instruments (eg highly leveraged bank lending). Hedge funds are also increasingly involved in corporate acquisitions. These have all led to bidding wars for the most attractive companies and an inevitable increase in the prices being paid for them. Furthermore higher levels of debt funding are being used which, whilst often maximising profit potential, also increase the risk of deal failure.

The globalisation of the World economy has also led to an increase in the size and number of cross border transactions. Globalisation also brings with it the challenges concerning convergence of language, culture and regulation.

AN ACCOUNTING MINEFIELD

The UK accounting authorities have sought to keep pace and significant efforts have been made to harmonise UK accounting standards with International Accounting Standards. Listed companies in the UK have been required to adopt International Financial Reporting Standards (“IFRS”) for some two years, and AIM companies (outside the definition of listed companies) are now required to adopt IFRSs from 1 January 2007. Private companies have been able to apply IFRSs from 1 January 2006.

It is important to recognise that UK and International accounting standards can differ wildly on the treatment and recognition of assets and profit. Furthermore new UK accounting standards continue to be introduced to further assist IFRS convergence.

Accounting for asset and profit recognition has never been more complex and each month brings with it new rules such as Financial Reporting Standards (“FRSs”), Urgent Issue Task Force (“UITF”) abstracts, Financial Reporting Exposure Drafts (“FREDs”), and International Accounting Standards (“IASs”). The changing scenery requires companies and their advisers to be constantly up-to-date especially when mergers and acquisitions are contemplated.

FERTILE BREEDING GROUND FOR DISPUTES

All the above factors provide a fertile breeding ground for disputes to arise. Furthermore any increases in interest rates and / or a downturn in the world economy will serve to magnify the inherent problems discussed above.

Many of the largest disputes arise following the sale and purchase of private companies. Disputes may arise simply where the Purchaser finds that the assets of the business acquired were overstated. This commonly arises via changes in accounting policies or the identification of accounting errors. The Sale and Purchase Agreement (“S&PA”) will usually provide an adjustment mechanism through the preparation and agreement of a completion date balance sheet. This is not without problem however and expert accountants are often involved to determine disputes.

However, more serious disputes may arise through breaches of warranties, misrepresentation / fraud and non-disclosure of material facts.

Breach of warranty

The Vendors often warrant matters such as historic profit levels, working capital levels and net debt levels. The Purchaser may sometimes believe that these warranties are not met and require the repayment of purchase consideration.

Such claims can be aggravated by the purchase price being calculated as a multiple of prior year profits, ie where the adjustment will not be £ for £ but a large multiple of the original error.

Misrepresentation and fraud

A purchaser may believe that he has been misled in such a serious way that he may bring a claim for misrepresentation. Further disputes may arise from allegations that the vendor has committed fraud by means of false accounting or stripping the business of valuable assets prior to sale.

Non-disclosure of material facts

Non-disclosure of material facts, for example product failures or violations of the law may also give rise to a claim. The Vendor, on the other hand, may believe that the claim is being brought due to the mismanagement of the business by the Purchaser or other unrelated factors such as a simple downturn in trade post deal. Sale and purchase disputes are increasingly commonplace and can be very destructive both to ongoing relationships (for example the Vendor and Purchaser may still trade with each other) and management time.

CHANGING ROLE OF ACCOUNTANTS

The accountants’ role pre-deal is changing. There has been significant growth in pre-acquisition financial review work, commonly known as transaction support or due diligence work. Also, a new product, contract vetting, is now being increasingly sold. Contract preparation has always (and will remain) the domain of the corporate lawyer, however accountants are now increasingly being instructed to vet contracts pre-deal to isolate potential problem clauses (be they ambiguous or incorrect).

Of course disputes, given human nature, will always arise. There are however many factors at play at the moment which could lead to a large increase in the number and size of disputes in the future.

Will Davies

Will Davies is a chartered accountant and partner with Grant Thornton UK LLP. He heads their forensic accounting team in the South West of England and Wales.

Equal Opportunities (TOP)

‘Tis the Season...

...for research about Equal Opportunities to be published.  Every year at around this time, emails and postboxes are indundated with the findings of polls and projects concerning diversity in the workplace.  Many of these constitute dry analysis.  So to save you having to muster any enthusiasm for wading through these documents, I have compiled a round-up that you can whiz through.

Why?

Because, in my view, there are important nuggets hidden in these research papers.  I hope that my brief analysis will either flag up issues that you think you could you should address, or talk about topics that chime with your experience, or maybe make you get more information if you have specific queries.

Manufacturing discrimination claims

The EEF has discovered, by carrying out a survey of its members, that discrimination and equal opportunities are seen as ‘burning issues’ for UK manufacturers.  The number of requests it has received for advice about discrimination to its helpline have increased 50% in recent months. This could well have a knock-on effect for those of us who have manufacturing clients. Their needs could have an increased emphasis on discrimination in the future.

Seeing is believing

Remploy, a supported employment programme for people with disabilities, has completed a study of employers’ perceptions of disability.  Apparently, employers largely associate disability with ‘things that can be seen’ – so with physical disability.

76.4% of employers agreed that ‘employers should actively work towards creating as diverse a workforce as possible.’  But, at the same time, 32.8% of employers believe that ‘there are only certain sectors and occupations that disabled people can work in.’

I think that it is significant that employers hold these contradictory opinions. When advising employer clients, it is worth remembering that such dichotomies exist.

Juggling work with life

The Department for Trade and Industry has reported back on the right of employees to request flexible working.  Their latest survey has found that the right for parents of young children to request flexible working has benefited all groups of workers.  Almost all employees (90%) reported that at least one flexible working arrangement was available to them if they needed it – an increase from 85% in 2003.

This issue form nearly half of all queries to the Equal Opportunities Commission helpline in Wales and so it is more likely that you will come across it when dealing with clients who are local to this area.

No direction on Health and Safety

The Health and Safety Executive has published a report following its own investigation into the Health and Safety obligations imposed on the directors of UK companies.  The UK does not do well, as the main finding is that many other countries impose positive safety obligations upon either directors or senior managers.  These include Germany, France, Italy, Sweden, Japan, Canada and Australia.

This may be worth remembering when trying to rationalise a multi national organisation or even to implement best practice in the boardroom of a UK company.

Bullying and Harassment

ACAS has been working with data under the Employment Equality (Sexual Orientation) Regulations 2003. It has found that the majority of claims were based on bullying and harassment, in particular verbal abuse, verbal threats, intimidation, being talked about by colleagues. Very often, such bullying has been going on for an extensive period of time, sometimes up to three years.

It is interesting to note that the employers’ response was generally to deny allegations.  Therefore, it may be worth checking that clients have procedures in place to deal with bullying and harassment.

Religion and Belief

The Institute for Employment Studies has made the finding that discrimination in relation to terms and conditions is a major theme in cases brought under the Employment Equality (Religion and Belief) Regulations 2003. Many claims related to an employer not accommodating the particular religious needs of the claimants. In a parallel study, ACAS found examples of this problem in that Jewish claimants had had problems leaving work early on a Friday, and Muslim claimants had encountered difficulties obtaining leave to celebrate Eid.

When dealing with clients with a diverse workforce, these are considerations that should not be overlooked.

Conclusion

I hope that, from this mixed bag of recent research, there has been information which has been of use. If you have any queries about any of the issues in this round-up, please do not hesitate to contact me on ewilliams@darwingray.com.

Please note that this provides a summary only of the issues addressed. It is not intended as a detailed commentary on the relevant law and any comments made should not be acted upon without first taking specific legal advice.

Eleanor Williams

Disclaimer The information and any commentary on the law contained in this bulletin is provided free of charge for informational purposes only. Every reasonable effort is made to make the information and commentary accurate and up to date. No responsibility for its accuracy and its correctness, or of any consequences of relying on it, is assumed by myself. The information and commentary does not, and it is not intended to amount to legal advice to any person on a specific case or matter.

Equal Opportunities (TOP)

The Equalities Review publishes its Final Report 

The Prime Minister commissioned an independent Equalities Review to investigate the causes of persistent discrimination and inequality in the UK. This group delivered its final report, “Fairness and Freedom” on 28th February. In somewhat sanguine mood, and with a phrase worthy of the opening of a Tolstoy novel, they start their report, “Even in the most tolerant of societies, some things should always remain intolerable.”  

The report goes on to insist, though, “But a long-term vision for our society should be founded upon what it wants to be rather than what it is not.” It is just such a long-term vision that is the substance of “Fairness and Freedom”. With such a far reaching scope, it is worth every practitioner’s office downloading it (174 pages in all) from www. theequalitiesreview.com”.

It then sets out the precepts of equality and how it wants, practically, to police that equality. Before it does so, though, it acknowledges that, “we have done better than other countries” in removing, “the grinding reality of everyday discrimination and harassment.”  

What lies behind Inequality?  

The report states that behind “crushing complacency” and “the prejudice that consigns some to society’s dustbin”, looms, “a persistent material, cultural and moral poverty that blights many homes.” The Equalities Review cites as an example of this prejudice, “A young woman from an ethnic minority may be talented and hard-working, but she is unlikely to be motivated as long as she can see the efforts of her parents or older siblings being frustrated by sexism or racism. That perhaps partly explains why Pakistani and Bangladeshi young women are three times as likely as similarly qualified White women to take a job for which they are over-qualified.”

Definition of Equality

In order to begin combating such stark examples, the Review has decided that the definition of equality, itself, needs to be amended. This report complains that traditional ideas of equality have been “based on the equality of outcomes, opportunities, process and respect”. A reliance on these notions, “have either resulted in a focus on income, or wealth”. The report would have preferred a consideration of, “all aspects of life that are important to people in leading a fulfilling life,” or at least of, “the economic, political, legal, social and physical conditions that constrain people’s achievements and opportunities.” Therefore, the definition of an equal society that the report recommends is,

“An equal society protects and promotes equal, real freedom and substantive opportunity to live in the ways people value and would choose, so that everyone can flourish.

An equal society recognises people’s different needs, situations and goals and removes the barriers that limit what people can do and can be.”

It is the hope of the Equalities Review that this will be a working definition that will allow them to track the progress of equality in a practical way.  

Equality in Context  

In order to make the definition as workable as possible, the Review sought to trace the progress made in this field to date. It noted that, “Legislation against discrimination has been very important in raising the profile of equalities issues; it has helped to establish the public value of eliminating prejudice and unfairness.” But, it continues,

“Past action to promote equality occurred piecemeal, in reaction to immediate social pressures.”  

A change of strategy is therefore required. “The old approach of a top-down state which pulls levers to improve outcomes for particular groups is no longer appropriate or effective. We must take account of the ways in which an enabling state operates in the 21st century and ensure that we focus on ends and not means. We must acknowledge the multidimensionality of inequality and tackle change across economic, social and political spheres.”  

Criminal Law  

Part of this multi-dimensional approach involves a consideration of law, particularly criminal law. The report is strident that, “Criminal justice agencies must work harder to improve people’s confidence in the criminal justice system, particularly people from ethnic minorities.” The report acknowledges that there are, “high rates of offending among young Black men. We know that there is a strong association between offending, and exclusion from school and failure at school – and that some ethnic minority groups are significantly more likely to experience these than others. Therefore, the report seems to be saying that barriers in one area of life have a ‘domino’ effect, adding to barriers in another area.  

Barriers  

The report asserts that barriers exist for three reasons. First, the very fact that prejudice persists is, of itself, a barrier. Second, “there remains a lack of awareness and understanding about what equality means”. Third, “there has been little clarity of who should deliver what, and whose responsibility it is to take the lead.” In all these three barriers, the report isolates, “the tools available are not fit for the purpose of achieving equality in today’s Britain.”  

Conclusion  

Therefore, the Equalities Review recommends a thorough overhaul of the framework for dealing with equality. The legal ramifications of this are that the report proposes a single, Equality Act. It goes on to stipulate two characteristics of such an Act:

• It must focus on a simpler, more coherent framework; and

• It must facilitate action to help groups as well as individuals  

What this means for you

The “Fairness and Freedom” report signals a shift in the world of Equal Opportunities. Equality issues are now being acknowledged as ‘multidimensional’. So, it is likely that every decision you make in your practice will have an equalities angle. Likewise, even if the case with which you are dealing does not appear to have an equal opportunity side to it, there may well be a latent prejudice. Just being aware of the extent of equalities issues, should prepare you for the future, as heralded by the Equalities Review.  

Eleanor Williams  

Disclaimer The information and any commentary on the law contained in this bulletin is provided free of charge for informational purposes only. Every reasonable effort is made to make the information and commentary accurate and up to date. No responsibility for its accuracy and its correctness, or of any consequences of relying on it, is assumed by myself. The information and commentary does not, and it is not intended to amount to legal advice to any person on a specific case or matter.

An Open Letter to Andrew Holroyd – Vice-President of the Law Society  (TOP)

Dear Andrew,

On Monday 19th March the Criminal Defence Solicitors Union held a really successful Rally in the Old Palace Yard, opposite the Houses of Parliament.

It was a truly inspiring occasion, with over a thousand Legal Aid Practitioners in attendance, and a host of politicians( including several Labour M.P.s ( Frank Dobson being one), the Shadow Lord Chancellor, the Shadow Minister for Legal Aid, Simon Hughes from the Lib-Dems and many others) all voicing their support for the fight against the Carter reforms and Means Testing.

Perhaps one of the most inspiring speeches was from the new Chief Executive of the Law Society, Des Hudson. What a breath of fresh air he is. He announced that the Society, now freed from regulatory and complaints handling, was going to take the fight to the LSC, DCA and the Government.

There would, he said, be a legal action against the “contract” (which we all know is nothing like a true contract), by the Society, and he urged us all to refuse to sign the wretched and unfair thing.

He was cheered to the echo. In fact I believe that he received the loudest applause of a pretty loud day of applause. Despite being frozen to the marrow by the wind and snow throughout the day, I returned to Wales with genuine joy that MY representative body had now “thrown away the gloves”, and was going full throttle to stop the “reforms”(actually merely slashing cuts) in their tracks.

And it wasn’t only me. Most of that large assembly of hard-working and truly vocational lawyers felt the same.

I was so looking forward to your address to us in the Park Plaza Hotel in Cardiff the day after. And that was heightened by your congratulating the CDSU President, Roger Peach, and me for the success of the Rally. Now we were really moving forward together!

May I say that I have NEVER felt so deflated by anything so much as the events of the two hours I spent at that meeting. How could such a volte face have occurred in a mere 25 hours? You and your two colleagues, far from assuring us of the Society’s determination to fight for the cause of social justice, and for the future of Legal Aid, far from confirming the concerns for the wellbeing and continued existence of the weakest area of your membership, simply gave us NOTHING but half-hearted platitudes and pessimism. A tangible fear of upsetting the Government. A throwing in of the towel. It was hardly inspiring to hear that you yourself would be “waiting to see” what the internet poll showed to be the mood of the Profession, before you decided, as a Legal Aid Supplier, whether you would or would not sign next Friday!

To say, as you did, that “Whilst Legal Aid Practitioners are an important constituency, the Law Society represents 120,000 solicitors”, implying that you were prepared to allow us stragglers to be cut off from the healthier members of the herd, was a massive kick in the teeth for those of your audience who looked to you for decisive guidance and support.

I suspect that the invaded Falkland Islanders were grateful that Thatcher did not have that attitude in the 1980’s.

And what sort of message does that give to the rest of the profession? That the Society that purports to be a truly representative body now, will pick and choose its fights? You actually said we should realise the difficulties because we are lawyers. Does that mean that pacifists should allow their own massacres by an army of psychopaths?

I said at that meeting that I knew that you are a truly decent man, and someone who has given long service to the Council. I am sure that you do not want your legacy to be that of “The President that caused the Government to sue TLS”.

But, Vice Pres, would it not be far worse to be remembered as the President who fiddled whilst Rome burnt, his members went bust and who watched whilst a truly remarkable Justice System was destroyed by a Government who only cared to get their spin-riddled statistics up to their manifesto predictions and promises?

This is a Government that is prepared to spend £8 BILLION on external consultants, and then either hide and/or ignore the findings of those consultants. A Government that has just announced that from April 1st there will be a surcharge of £15, on the fines/costs of each and every defendant found or pleading Guilty in the courts. And if the court DOESN’T levy that amount, it, THE COURT ITSELF, will have each and every £15 deducted from its budget, raising the probability of enforced budgetary redundancies amongst Legal Advisers and court staff .(Incidentally, this surcharge is apparently destined for the “Victims of crime”. I wonder whether some might be siphoned off for the Olympics, the Dome or even for yet another strata of NHS administrators?)

To be told by your companions at Cardiff that they had found negotiating with the LSC “intimidating and unpleasant” indicated to me that they were not up to the job. I suggest you appoint people who don’t give a fig and are not as easily upset. Possibly trained negotiators. Or even Criminal Hack Advocates like me, who have nothing to lose, and will get the message across that we mean business. It doesn’t matter what point we pick to take to the High Court. Get some independent minded judge, and there are plenty, to say that this whole cost-cutting charade is morally wrong, and that their maths is wrong. That this is a fundamentally flawed and illegal process.

And there is another point. The Special General Meeting held in January (which you will recall was concluded with all parts of the resolution being passed unanimously) mandated you to fight, to fight with every weapon at your disposal, and to lead your members in that fight.

Andrew, most of the people in that meeting on Tuesday in Cardiff, will be out of the Legal Aid System, or out of business by the time Easter 2008 comes. If the Law Society gets sued by this vicious Government, then if it highlights their loss of these committed professionals, and more importantly, the end of true access to justice, then it will be a small price to pay. I believe your membership would be far more supportive of a poorer, but more committed representative body. You might even find that they would voluntarily pay to be members!

It is time for the Society to take a risk. Time for the Society to cast aside worries about its future and to take up the cudgels on behalf of its threatened members and the vulnerable of our citizens. Time to actively advise Solicitors to refuse to sign this “Bully’s Charter”.

In the week when Sally Clarke, a fellow Solicitor, died, almost certainly from the effects of a miscarriage of justice, would it not be so very appropriate to fight to stop the inevitable march of hundred upon hundred of similar miscarriages?

You cannot have an adversarial system of justice, when there is only one adversary, and the defendant is expected to do a job that it takes the better part of a decade to learn to do.

For the Love of God, speak with your Chief Executive. And ask him to loan you his hymn sheet.

As ever,

Simon Mumford

Vice President, CDSU

21st March 2007