What are the differences between fact witnesses and expert witnesses in court?
Fact witnesses and expert witnesses both serve an important role in court proceedings.
However, while fact witnesses’ role is limited to personal knowledge of the facts, expert witnesses offer specialised knowledge and interpretation of the facts. Their insights often bridge the gap between intricate matters and the court’s understanding, shaping informed decisions.
What, then, is the exact scope of expert witnesses’ knowledge and testimony, as it relates to company valuations? And what are the rules governing their use in court?
Fact witnesses and expert witnesses: the nature of their knowledge and testimony
Fact witnesses provide testimony based on their direct, personal knowledge of events or facts related to the business being valued. For example, a company’s CFO could testify about the firm’s financial records and performance as a fact witness.
According to Practice Direction 57AC, the role of fact witnesses is as follows: “Factual witnesses give evidence at trials to provide the court with testimony as to matters of which they have personal knowledge, including their recollection of matters they witnessed personally […]”
The role of expert witnesses, on the other hand, is to provide “objective, unbiased opinions” based on their specialised knowledge in business valuation. They interpret facts, apply valuation methodologies (e.g. the income, market and asset approaches), and draw conclusions about a company’s value.
Expert witnesses will generally engage in a more extensive preparation process, including: thoroughly reviewing case materials and financial records, looking at average Income/ Enterprise Value (“EV”) ratio amongst comparable businesses, preparing detailed valuation reports outlining their methodology and conclusions, and anticipating challenges to their analysis.
Rules on expert witness use
English courts impose strict regulations on expert evidence, outlined in Civil Procedure Rules (Part 35), Practice Direction 35, and related protocols.
Parties involved in disputes have a duty to limit expert evidence to what is necessary for resolving the case and must obtain court permission to present expert witnesses or reports. In complex commercial cases, each party can typically hire their own experts, however claimants, holding the burden of proof, generally lead in expert engagements, leveraging these specialists to fortify their cases.
However, the court may appoint a single joint expert for less contentious issues in high-stakes cases.
Ultimately, like a factual witness, an expert witness’s primary obligation is to the court, requiring them to provide impartial and unbiased opinions, regardless of who engages or pays them. Their allegiance must be to the court.
In the 2015 case ‘Van Oord Ltd and another v Allseas UK Ltd’, for example,the testimony of the quantum expert was discounted in its entirety for taking the claimants’ claims at face value without checking “the underlying documents that supported or undermined them”.
High-profile court cases where expert witnesses have been used
Recent valuation dispute between JP Morgan Chase & Co and Haris Karonis, the founder and CEO of Viva Wallet
JPMorgan bought its 48.5% stake in Viva in 2022 for roughly €800 million and, under the terms of that deal, the bank could take full control of Viva if it’s valued at less than €5 billion by July 2025.
Karonis argued that JPMorgan was actively undermining Viva’s valuation to maintain its minority stake without investing further. At last count, there was a €2 billion gulf between Viva’s worth in the eyes of its own valuation witness, EY, and that figure as seen by JPMorgan’s valuer, Houlihan Lokey: the former valued the business at €3 billion, and the latter at €1 billion.
Haris Karonis argued that Houlihan Lokey’s calculation was “invalid because it was manifestly wrong.”
In the end, the judge ruled that Viva Wallet should be valued according to its full market potential, including its potential US expansion plans. The UK court also decided that in determining fair market value, the valuation experts were required to disregard obligations, restrictions, and/or limitations applicable to the company or its shareholders under Regulation K of the US Code of Federal Regulations (and some related regulations).
The key takeaway? Expert testimony in business valuation cases involves more than just crunching numbers; it requires careful consideration of various complex factors to accurately assess fair market value.
Dell Inc. appraisal case
In 2016, the Delaware Chancery Court ruled on the fair value of Dell Inc. shares after shareholders claimed the 2013 buyout price was too low. Testimonies from seven fact witnesses and five expert witnesses were key to the decision. Dell’s expert valued the shares at $12.68 per share, while the shareholders’ expert argued for $28.61.
The court settled on $17.62 using its own discounted cash flow (DCF) analysis, combining inputs from both sides.
The Delaware Supreme Court later criticised the wide disparity between these expert valuations, noting the “enormous valuation chasms caused by the over 1,100 variable inputs in the competing DCFs“. They ruled that the Chancery Court’s decision to disregard “the market-based indicators of value” (like stock price and deal price) and over-reliance on DCF methods of valuation was ill-judged.
The key takeaway? Expert testimony in business valuation cases rely on a complex blending of methodologies, subjective assessment and factual inputs to arrive at a fair market value.