The interests of shareholders (or former shareholders) and corporations (and remaining shareholders) often diverge when buy-sell agreements are triggered.
In the real world, motivations, whether actual or perceived, are embedded in many process agreements. These motivations are clear for buyers and sellers whose interests are obviously different. The motivations for the appraisers are less clear. Appraisers are supposed to be independent of the parties. Nevertheless, based on our experience, it is rare for the appraiser retained to represent a seller to reach a valuation conclusion that is lower than that reached by the appraiser for the buyer. This does not at all imply that both appraisers are biased. Consider the following possibilities:
Legal counsel for each side desires to protect the interests their clients. As such, in the context of buy-sell agreements, the thinking may occur as follows:
“If my client is the seller, we need to be able to select ‘our’ appraiser, because the company will select its appraiser. Since I am concerned that the company will try to influence its appraiser on the downside, I want to be able to try to influence our appraiser on the upside. Since we are selling and they are buying, this is only natural.”
For purposes of this discussion, if the two appraisals are not sufficiently close together, they can be viewed as advocating the positions of the seller and buyer, respectively. All the parties and their legal counsel may begin to think:
“What is needed now is a ‘truly’ independent appraiser to finalize the process.”
Many process agreements call for the two appraisers to select a third appraiser who is mutually acceptable to them because:
“Surely, ‘our’ appraiser and ‘their’ appraiser, working together, can select a truly independent appraiser to break the log jam since neither side has been successful in influencing the outcome of the process. But, now that we have a third appraiser, what should his or her role be?”
The role of the third appraiser will be determined by the agreement reached by the parties. Consider the following:
We speak here from personal experience. Professionals at Mercer Capital have been the first, second, and third appraisers in numerous buy-sell agreement processes. Clients sometimes do attempt to influence the appraisers, either in blatant or subtle fashion. This is to be expected and is not nefarious. Clients are naturally influenced by their desire for a conclusion favorable to them.3 The purpose of process buy-sell agreements, however, regardless of their limitations, is to reach reasonable conclusions.
Multiple appraiser buy-sell agreements have advantages.
There are several disadvantages to multiple appraiser buy-sell agreements:
Based on our experience, multiple appraiser process agreements seem to be the norm for substantial private companies and in joint venture agreements among corporate venture partners. The standard forms or templates found for process agreements at many law firms include variations of multiple appraiser processes similar to those described previously.
As business appraisers, we participate in multiple appraiser buy-sell agreement processes with some frequency. Because of the reputation of our senior professionals and our firm, we are called into valuation processes around the country. Chris Mercer has been the appraiser working on behalf of selling shareholders and companies, and has been the third appraiser selected by the other two on other occasions. As the third appraiser, he has been required to provide opinions where the process called for the averaging of my conclusion with the other two as well as averaging with the conclusion nearest mine. He has also been asked to pick the better appraisal, in his opinion, given the definition of value in agreements. He has also been the third appraiser who provided the only appraisal. Others at Mercer Capital have also performed similar roles.
This experience is mentioned to emphasize that the disadvantages of multiple appraiser appraisal processes outlined here are quite real. We have seen or experienced first hand every disadvantage in the list above. We hope to provide alternatives with more advantages and fewer disadvantages based on our collective experience at Mercer Capital.
Articles , Buy-Sell Agreements