August EWJ 24 - Flipbook - Page 67
Transaction Disputes: Is There a
Scenario in Which You Can Ever
Get Back More Than You Paid
(b) fraudulent misrepresentation (an intentional or
reckless deceit to induce buyers).
Introduction
With cross-border transactions increasing and the inherent complexities involved so are the number of disputes. The latest London Centre for International
Arbitration report noted that 15% of arbitrations
related to Shareholders’ / Share Purchase or Joint
Venture disputes in 2023 compared with 10% in 2022.
If this misstatement or fraudulent misrepresentation
is significant enough or the margins of the business is
sensitive enough, a valuation on a going concern or
operating basis may quickly become negative. This alternative may mean the business was not a viable or a
going concern when purchased.
In this article we specifically consider the calculation of
damages in post-transaction disputes and in particular the calculation of purchase price or fair market
value. With the increase in complex international
transactions, it is not unusual to see adjustments from
breach of warranty or fraudulent misrepresentation
claims that result in adjusted purchase prices or fair
market values that results in nil or negative values.
Liability aside, this would give cause for a claim for the
losses suffered by the claimant. However, would it be
fair and equitable for any claimant to really get back
more than they paid?
This would depend on the business’ highest and best
use, which is defined by the International Valuation
Standards Council as “the use of an asset that maximises
its potential and that is possible, legally permissible and
financially feasible.”
Whilst there might be some legal and factual
implications for each individual case. This article
explores whether you can have a negative value.
The highest and best use may be to continue with an
asset’s existing use or for some alternative use. Therefore, whilst an asset could have a negative value on an
operating basis or going concern there may be an
alternative valuation approach that results in a higher
value.
The commercial rationale for a transaction
In a straight forward transaction, you have a buyer
and a seller, the buyer provides positive consideration
(normally monetary) in exchange for an asset
(normally an operating business).
It is very rare that you hear of a deal for negative
consideration, that being the seller of an asset or business provides the buyer with the asset or business as
well as a sum of money to take the business. This is because there can be other more commercial options for
the owners of the assets, including for example, to
liquidate the business and sell the net assets.
Calculating the alternative value
This alternative value could be assessed by looking at
the net asset value or liquidation value, effectively what
residual value remains after the operations are ceased
and all the assets and liabilities are settled. For example, on an operating basis the value might be negative
£5 million, however, the liquidation value is positive
£5 million. Therefore, the highest and best use would
be to liquidate the assets. Assuming the buyers paid
£10 million for the assets, the damages might be £5
million, being the difference between the purchase
price and the highest and best use value of £5 million.
Therefore, most deals are concluded for a positive
consideration. However, if information is not complete
or full you might find a scenario in which positive consideration is paid for an asset or business, whereas an
alternative scenario for example, liquidating the
business would have been more appropriate.
However, there are scenarios where a negative value
is still the best outcome and continuing to operate the
business returns the highest and best value. This is
particularly so for entities with large infrastructure or
legal obligations, an example being an upstream oil
and gas entity.
An example might be a division of a larger business
that is carved out and sold, whilst it can operate on its
own, certain assumptions would need to be made to
understand the likely revenue and profit of operating
as a standalone operation, particularly where overhead costs are shared. If this information is incomplete or wrong the basis of the purchase price or
valuation is likely to be wrong.
A significant portion of value in an oil and gas
transaction may be impacted by decommissioning liabilities. The operating value may be £150 million and
decommissioning costs £100 million, equating to a
value of £50 million.
The role of international arbitration
This is why many sale purchase agreements have
specific dispute clauses that protect the buyer and why
you often see post-transaction disputes either:
(a) through error (for example where financial statements are warranted and later found to be misstated);
and / or
EXPERT WITNESS JOURNAL
Considering a scenario where the oil production was
overstated, and decommissioning was understated in
a fraudulent misrepresentation claim. The revised values might be an operating value of £115 million and
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AUGUST 2024
