The Role of Shadow Valuation Experts in Family Law
In family law, when there are disputes over the division of marital assets, including businesses, real estate, investments, and other valuable holdings, the process of valuation becomes crucial. Valuation experts or appraisers may be hired to determine the fair market value of these assets. These experts provide their professional opinions on the value of family assets, which can significantly impact property division, alimony, and other financial aspects of divorce proceedings. These professionals must be independent, neutral expert witnesses which have an overriding duty to the Court.
The use of a jointly appointed Single Expert witness is now a firmly established practice in BC Family Law. However, the joint appointment of a Single Expert does not preclude a party from appointing their own hidden expert, often called a Shadow Expert. The appointment of a Shadow Expert is certainly not mandatory and whether such an appointment is justified depends on the nature and quantum of the case.
The Role of a Shadow Expert
Shadow Experts are more common in larger and more complex cases where the financial stakes are very high. The role of a Shadow Expert is to advise their client (and their legal counsel) throughout the entire dispute. This may include the following activities:
- Assisting the client in the selection process for the jointly appointed Single Expert: For example, the Shadow Expert may provide useful guidance as to the best valuator for a specific type of business. It may be useful to review the terms of the engagement letter to ensure that the scope of review is appropriate.
- Explaining the valuation process: Clients often benefit from gaining knowledge of the valuation process and methodologies likely to be used by the Single Expert. This helps the client understand and prepare for the issues likely to surface and the impact they might have on the Single Expert’s valuation conclusions.
- Providing advice on communications with the Single Expert: This might include reviewing the Single Expert’s request for information or questions about the business so the client may understand the reasons for such questions, and how they should be interpreted. Equally important will be to assist the client in responding to the Single Expert’s enquiries to ensure responses are complete and accurate, while not providing more information than is necessary.
- Preparing an indicative valuation: While not necessarily providing a formal valuation report, it may be useful for the client to have a preliminary indication of value for settlement negotiations or planning purposes.
- Review the valuation report prepared by the Single Expert Witness: A full review of the Single Experts report is critical. The Shadow Expert should:
- Consider the appropriateness of the valuation methodologies used.
- Test the reasonableness of the assumptions applied by the Single Expert, which might include:
- a market level of compensation assumed for an owner manager’s role in the company, the working capital requirements of the business, the estimated value of redundant assets held by the business and the tax cost recognized to extract them, the expected long-term growth rates for the business, or the assumed cost of capital for the business.
- Cross-check some of the market data obtained by the valuator (i.e., comparable transaction pricing multiples, key industry trends, etc.)
- Prepare questions for the Single Expert Witness: After performing a detailed review, it may be helpful to prepare questions on comments on the Single Expert’s valuation report. The objective of these comments will be to:
- correct any factual errors found in the report,
- provide new information for the Single Expert to consider, or
- challenge any aggressive assumptions used by the Single Expert valuator.
- Assist counsel in preparing for cross-examination of the Single Expert Witness. If the Single Expert refuses to correct errors found in the report, consider new information as appropriate or apply additional appropriate valuation methodologies, the Shadow Expert can assist counsel in preparing questions for cross-examination.
Shadow experts serve as an extension of the appointing party without providing direct testimony during the proceedings. Instead, their primary objective is to support the appointing party in building the strongest possible case. This stands in contrast to an impartial and independent Single Expert, whose duty lies with the Court or tribunal to present unbiased expert evidence.
Limitations to Consider
Upon the appointment of the Shadow Expert by one party, they are subsequently prohibited from serving as the Single Expert witness in the same case.
The Court will also limit the use of a Shadow Expert’s testimony, preventing its direct application.
Furthermore, it is imperative that the Shadow Expert refrains from any communication with the Single Expert Witness.
If you have any questions about how we can assist in your Family Law dispute, please contact one of our Chartered Business Valuators.
