A Russian supply-chain business owner was awarded US$58 million in damages—until the English High Court and judge Sir Ross Cranston reviewed the maths. The London Court of International Arbitration (LCIA) panel had, apparently, added the value of historic tax liabilities, rather than subtracting it. While the correction reduced the damages to US$4 million, the panel did not change the award, arguing that, despite the analysis mistake, the original amount was fair.

The High Court disagreed in Doglemor Trade v Caledor Consulting [2020] EWHC 3342 (Comm).

Valuation was already a problem before the computational error was introduced. Doglemor had engaged Benjamin Sacks, and Caledor hired Philip Haberman. When the LCIA agreed on the award (in January 2020), Caledor’s experts argued the shares in question had a value of US$174 million. Meanwhile, Doglemor claimed that the 30% call options were worthless. The arbitrators concluded US$118 million.

It was then that the Doglemor side pointed out the ‘mistake resulting from its failure to make a deduction through overlooking the instruction in the agreed valuation model to enter the tax liabilities figure as a one to be subtracted rather than added.’ This correction, they argued, reduced the damages dramatically—to US$4 million. LCIA admitted the error but said the award should not be corrected.

The LCIA’s analysis and High Court’s decision are of particular interest to business valuers because they include lengthy discussions of the business valuation methods and results. Highlights include descriptions such as:

• Both experts used the discounted cash flow method as their primary method of valuation but ended with strikingly different enterprise value conclusions;
• The Tribunal was particularly interested in the valuers’ assumptions about EBITDA margin (Mr Sacks used a 7.1% margin whilst Haberman chose 13.5%); and the appropriate WACC (again, Sacks used 10.9%, and Haberman chose 15.5);
• Neither the LCIA nor the High Court valued market comparables to support the DCF assessments; and
• The Court expressed concerns about applying ‘mechanistic or arithmetical’ approaches to normalisations of the income statements.