Increasing Disputes Put Value Under Scrutiny

Commercial disputes between people in business are increasing, fuelled by difficulties faced in tight economic times. When times are good it's far easier for people to accept, or in some cases turn a blind eye to, contrasting business philosophies. But when profits or cash flow are poor, it's natural to focus on extracting every aspect of value, and often that involves turning attention to suppliers, co-shareholders, or business colleagues. Over the past year our expertise has been increasingly called on to put a value on what the aggrieved party believes they have lost as a result of the action or inaction of the other party. We typically work closely with legal counsel for the claimant or defendant.

The most frequent, and probably more straightforward cases involve businesses which are simply no longer profitable enough to sustain a number of working owners. While the parties may have agreed on that, they often cannot agree on which owner or shareholder should sell to the other/s and what their share is worth. It's a quandary. The seller sees that they are permanently giving up their right to future income from the business or shares and expects to be well compensated, while the purchaser believes they are buying out the balance of a poor performing and risky business, for which they should pay very little. In the simpler cases an independent appropriate valuation will suffice. Sadly, though, disputes often become entrenched. For instance, we recently acted as expert witness, supporting legal counsel, for a one third shareholder in a significant retailing business. The relationship between our client and the other two thirds shareholder had deteriorated woefully. About all they could agree on was that they should no longer be in business together! Despite concerns over several decisions which were being made, our client had virtually no influence because he was a minority shareholder - and a minority at the board table. The company had been under-performing for several years (resulting in the shareholder dispute in the first place) and liquidation was a realistic prospect. With the shares being worth more by liquidation than was justified based on profitability, adopting this valuation approach on behalf of our client ultimately resulted in a settlement between the parties and a very good (in the circumstances) outcome for our client. While valuation of shares or businesses is a frequent type of dispute where Polson Higgs provides litigation support, others involve quantifying damages or financial loss as a result of inappropriate action or inaction by another party. Examples of recent cases in which we've been involved include: A partner in an engineering business who, while still a partner, liaised with a competing business for them to secure a significant construction job. He subsequently left our client's partnership to join that competitor. We worked with legal counsel to determine the outcome that would have occurred if the partner had not breached his fiduciary obligation and to then prepare a financial model (on a discounted cash flow basis) of the financial loss sustained by our client partnership as a result. A client company operated a small boutique hotel in Central Otago. They obtained professional advice recommending that the hotel rooms be unit titled and sold to obtain some equity, but the professional advisor failed to advise that the sale proceeds would be taxable. By comparing the actual outcome achieved after tax, with the alternative of not having subdivided, we found that our client was in a worse position as a result of following the advice (and the lack of advice about tax). We successfully established and supported a damages claim against the professional advisor. It's far better to avoid commercial and legal dispute, but they are a harsh reality in commercial life, particularly in tough times. If you become involved in such a dispute seek advice quickly as relationships rapidly deteriorate and inflexible positions are adopted. Contact Henry van Dyk and Stephen Higgs in Dunedin and Noel Walton in Christchurch. << Back to August 2010 News Archive Last updated: 31st August 2010 | 8:30 am