The counter facts Chronology
Commerciality
The key marker on the timeline of a counterfactual valuation exercise is the fork in the road. The point at which the alleged act(s) took the value of the subject asset down a different path than that which it otherwise would have followed. That may not however be the date at which a valuation is required. More typically, a counterfactual-centred dispute requires a valuation to be conducted at a point in time after the fork in the road, but assuming the counterfactual pathway had been followed, not the actual one. Nonetheless, the expert valuer will typically need to go back to the fork in the road and build a picture of the counterfactual from there. It is then necessary to consider what information it is appropriate to rely upon. A ground rule is that a valuation at a past date should be based only on information that was available at that date, and nothing subsequent. The valuer is tasked with turning the clock back to the appropriate date, and gathering the relevant information that then existed, that would be used to assess the value of the subject asset. Where the valuation date comes after the fork in the road, the valuer’s task also includes determining the suite of information that would be likely to have existed in the counterfactual scenario. Taking the previously mentioned container terminal example, that may mean preparing several years’ worth of counterfactual financial statements based on a best-estimate out-turn for the business, in order to assess the financial performance and position of the subject company at the relevant valuation date. Such an exercise may require a combination of research, benchmarking, probability assessment and financial modelling. The more evidence-based such an exercise is, the more compelling the resulting valuation.
The valuer must start with a detailed understanding of how events are assumed to differ from historical reality in the counterfactual scenario. What exactly would have occurred differently if the alleged actions had not taken place? This can range from the simple to the complex. A simple counterfactual example would be: what would have been the outcome of a sale process if the seller of an asset had conducted an open market M&A process rather than transferring the asset privately to a related party? Essentially, how would market value have differed from the actual transaction price? As a more complex example: what would the current financial position and value of a subject company be if a plot of land that was seized from it by a bank had been used to develop a container transhipment terminal, the company had secured contracts in line with the business plan and operated the facility for the last several years? A precise understanding of the counter facts is necessary in order to ensure that the question being answered by the expert is the exact question being asked. Given potential nuances between the framing and the interpretation of a counterfactual scenario, it is often important that instructing solicitors and the appointed valuation expert discuss certain details within the valuers’ instructions before they are finalised. Outside of the dispute arena, other court-determined processes such as schemes of arrangement and restructuring plans also rely upon counterfactual valuation evidence. The successful sanctioning of such cases depends on the judge being comfortable that no party (typically being compromised creditors) is worse off under the proposed restructuring than they would be in the most likely alternative. Expert evidence is required to present the most likely hypothetical scenario that would unfold if the plan were not to be approved, and what the value of the subject company would then be.
A third key aspect is commerciality: ensuring (and being able to evidence) that the analysis underpinning the counterfactual information and the resulting valuation is conducted in a manner consistent with the commercial realities of the situation. What is most likely to have happened in the real world if the counterfactual had unfolded? And how would the commercial factors at play influence the value that would have been attributed to the subject asset? Whilst theory and accurate analysis are fundamental disciplines of valuation, demonstrating the likely commercial realities of a given situation is equally important in preparing a compelling expert opinion. Opinions with impact require: 1. Expertise: Any testifying expert must understand and respect the limits of their own expertise. Direct knowledge and experience are essential parts of the toolkit, whilst recognising which elements sit outside one’s boundary of expertise is also critically important. 2. Evidence: Supporting assertions and assumptions with a strong body of evidence gives weight to an expert opinion, whilst unsupported statements can leave the door open to challenge. 3. Storytelling: The ability to bring the relevant fact- base, valuation analysis and supporting evidence together in a digestible and lucid manner helps the opinion that is ultimately expressed to have maximum impact.
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