Navigating a Crisis: Special Valuation Issues

COVID-19’s impact on businesses, deals, projects, and markets is likely to spawn a flood of valuation issues and potential valuation disputes. Valuation exercises often are factually complex and difficult in the best of times. In times of economic crisis and market downturn, valuation is particularly challenging.

In the coming weeks and months, our clients are likely to face difficult valuation issues. Valuation is critical in disputes over business interruption insurance claims; disputes involving delayed or abandoned construction or investment projects; post-M&A disputes, including representations and warranty disputes between buyers and sellers or between insurers and insureds over rep and warranty insurance; IP disputes; and disputes over collateral asset valuation.

In normal economic times, historical data like past revenue or comparable sales generally is useful to determine current value. However, in times of sudden crisis, the relevance of historical data is less clear, and the valuation exercise becomes more complex. We have seen this several times. In the late 1990s, the Russian government imposed severe currency exchange restrictions, and the market for ruble/dollar swaps froze. Collateral valuation became difficult with no market to mark the assets to. Similar issues arose during the subprime financial crisis, when the market for mortgage-backed securities and CDOs seized. And following the September 11 attacks, businesses in and around the vicinity of ground zero in New York shuttered and claimed lost profits under business interruption insurance policies. But the attacks occurred in the midst of a recession. To what extent were the lost profits the result of property damage from the shutdown, as opposed to the expected consequence of an economic slowdown?

When facing potential valuation issues in this sudden COVID-crisis, it is critical to take stock of those issues early. We recommend that you:

1. 1. Form an internal team. Assign internal responsibility for your serious valuation issues early. Familiarize them with the complexity around valuation in these times. Instruct others in your organization to work with this team on any valuation issues they face so that you have a consistent and coordinated approach.
   2. Be careful about written communications. In times of uncertainty, people tend to speculate. Later, in a dispute, your written communications speculating on value (whether internal or with your counterparty) could be taken out of context and used against you.
   3. Get your outside advisors on board early. If you have a dispute over valuation, you will need outside advisors—experts and attorneys. Engaging them early will help you form a cohesive strategy that can survive throughout the course of any dispute you face. Make sure you engage experts who understand the concepts around valuation in a down market/valuation of illiquid assets.

Next Article in This Series —

Navigating a Crisis: Dealing with Delegated Authority

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