Expert-client communication casts doubt on valuator’s independence

TWC I, L.L.C v. Damos, 2015 Iowa App. LEXIS 438 (May 20, 2015)

Most appraisers working in litigation know that discovery leaves little room for dodging. But, as a recent statutory appraisal case shows, there remain those who allow the client to steer the valuation in the vain hope that no one will ever know.

A minority shareholder objected to the sale of two related construction companies, arguing the sale price did not represent the fair value of his shares. He retained an experienced business valuator who agreed with the companies’ expert that the net asset value approach was the proper valuation methodology. But he arrived at substantially higher values for the companies’ accounts receivables and “backlog,” work the company had contracted to do but had not yet completed, than the opposing expert and a considerably higher overall valuation. He said the per-share price was $199, whereas the companies’ expert put it at about $71, below the sale price.

Whatever legitimate arguments the dissenter’s expert had to support his calculations, the trial court was unwilling to consider them. Leaving aside technical errors that had slipped into the valuation, the court found the expert’s testimony was compromised because communication including the expert, the client, and the client’s counsel indicated that the expert “backtracked” his value determinations to those the client and counsel had proposed.

To find out more about the case, which ended up on appeal, click here.