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Page 1 Compensation for Expropriations in Investor‐State Disputes The evolving role of the valuation expert Presented By: Kiran Sequeira Navigant Consulting, Inc. Page 2 All Rights Reserved. Overview of Investment Treaty Claims as of 12/31/20071 • 290 known claims filed in total — 62% with ICSID, 28% UNCITRAL, 10% other — 78% BIT disputes, 13% NAFTA, 6% ECT, 3% CAFTA/Other — 8 claims against Russia, 9 against India, none against China & Brazil — Argentina has highest number of claims (46) registered against it • 119 cases concluded — 42 awarded in favor of State — 40 awarded in favor of Investor — 37 cases settled • 10 awards on merits made public in 2007 — 5 awarded to investors — Tribunals awarded $615 million of the $1.8 billion in total damages sought 1. Source: United Nations Commission on Trade and Development (UNCTAD) Page 3 Navigant Consulting’s Experience in Investor‐State Disputes • Served as financial and valuation experts in 33 investor‐state disputes — 7 NAFTA Disputes — 8 Energy Charter Treaty Disputes — 18 BIT Disputes (ICSID, ICC, UNCITRAL) • Even representation of Investors and States • Cases span various industries — energy, natural resources, infrastructure, financial services, manufacturing, retail • Cases span various geographies — North America, Latin America, East Europe, Africa, Middle‐east, Central Asia, South Asia, Far‐East • Damages sought have exceeded $100 million in 15 cases, and have exceeded $1 billion in 4 cases. Page 4 Damages in Investor‐State Disputes • Claimant’s objective is to be adequately compensated for harm suffered due to State’s actions • Two key steps for achieving this goal — Establish liability (breach of BIT or multilateral investment treaty) — Establish damages arising from breach • Compensation in expropriation matters entails valuation of Claimant’s investment or business — Requires the services of a valuation expert • Claimants may not recover adequate damages even when liability is established if: — Valuation is unsupported, inflated, or overly optimistic — Valuation expert does not adopt a well‐reasoned and defensible valuation approach Page 5 What is the Role of the Valuation Expert? 1. Conduct a valuation of the expropriated investment 2. Prepare and submit valuation report 3. Testify before tribunal at the hearing Page 6 Conducting the Valuation 1. Determine what is to be valued 2. Gather information on company and investment 3. Interview key personnel (operations, finance, sales) 4. Perform valuation a. Income Approach (DCF Valuation) b. Market Approach (Comparable Public Company and Comparable Transaction Valuation) c. Other approaches if applicable (real options, prior transactions involving investment) 5. Reconcile valuation results and conduct sensitivity analyses 6. Determine final valuation Page 7 Suggested Approach for Conducting the Valuation Determine the Valuation Purpose Perform Comparable Transaction Valuation Page 8 Gather Subject Company Financial Data Conduct Interviews with Key Personnel if Possible Reconcile Valuation Approaches Determine Final Valuation Perform DCF Valuation Perform Comparable Public Company Valuation Prepare a Valuation Report Develop Your Valuation Support Key Considerations for Valuations in Investor‐State Disputes • Standard of Value — Fair Market Value “the amount at which property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have a reasonable knowledge of the relevant facts.” (American Society of Appraisers) • Valuation date — Date of harm is most commonly used — Current date has occasionally be adopted for unlawful takings • Pre‐award interest — Risk‐free or commercially observable rate (LIBOR, prime, etc.) — Simple vs. compound interest • Challenges in conducting valuations in emerging markets — — — — Page 9 Limited information on market/industry Language barriers (reliance on translated documents) Different accounting and financial reporting standards Risks (currency risk, political risk, market risk) Common Errors in Valuations Conducted for Investor‐State Disputes • Wrong entity or asset is valued; valuation does not align with legal claim • Only the DCF Method is Attempted — Valuation conclusions not verifiable — Valuation cannot be justified in conjunction with other valuation information pertaining to the investment Price paid for the investment at an earlier date Prices for comparable investments that are publicly traded or acquired Rates of return are not believable • DCF Projections are speculative and unsupported — — — — Assumptions and input data are not adequately supported or justified No analysis of the economy or industry No differentiation of the risks in a foreign market Assumptions are unsupported • A range of values is provided that is highly divergent Page 10 The Valuation Report • Role of the valuation expert is to assist the tribunal in determining the appropriate compensation for the expropriation • Elements of a successful valuation report: — Know your audience Distill complex economic and business issues into concepts readily understood by the tribunal — Provide adequate background (industry, company, investment), but do not make report overly long or convoluted — Describe the steps performed in constructing the valuation Discuss all valuation methods considered and assumptions made Reconcile results of multiple valuation approaches Discuss the basis for any valuation discounts or premiums — Support your work Page 11 Produce all exhibits and source documents needed to recreate the valuation What to Look For in Selecting a Valuation Expert • Expert has prepared valuations in the context of arbitration/litigation — The work should be subject to cross examination — Valuations done in other contexts are not subject to as much scrutiny (e.g., some fairness opinions, M&A analysis) — Experience with investor‐state arbitration and the arbitral process is helpful — Credibility with arbitrators is helpful (e.g., prior testimony before tribunal member) • Valuation reports are robust, defensible and well‐articulated — Expert’s valuation reports have been adopted or relied upon by tribunals in the past — Request a sample report • Industry expertise is helpful – but not necessary — It is often more advantageous to engage a separate industry expert. — Your industry expert can prepare a report on the market or the key technical inputs to the valuation (his/her area of strength) — Your valuation expert can rely upon market/technical analysis to construct reasonable projections to use in the valuation Page 12 Page 13
