Expert Evidence on Share Valuations: When to use hot tubbing in unfair prejudice petitions
A critical part of any unfair prejudice petition is the valuation of the minority shareholding. Paul Mitchell QC and Nigel Burroughs of 4 New Square were counsel on different sides in Swain v Swains Plc, a case in which the expert share valuation evidence was taken concurrently. They look at the pros and cons of hot tubbing, and offer practical advice on how to approach the way experts should give their evidence.
What is hot tubbing?
Hot tubbing, or the process of giving evidence concurrently, was formalised by the Jackson reforms in April 2013. Prior to the amendments to the Civil Procedure Rules in 2013, the process of experts giving evidence concurrently was managed on an ad hoc basis by agreement between the parties, their counsel and the judge. This typically happened in the construction cases where highly technical evidence was often required. In this article, we consider the use of hot tubbing to receive expert accountancy evidence regarding share valuations in unfair prejudice petitions pursuant to Section 994 of the Companies Act 2006.
The procedure for giving evidence concurrently is set out in paragraph 11 of the Practice Direction to CPR Part 35. If the court decides that it is appropriate for expert evidence to be given concurrently, it may direct that the parties agree an agenda based on the areas of disagreement identified in the experts’ joint statement. The trial judge will then lead the process by asking the experts, in turn, for their views on each agenda item. He may then ask follow up questions. It is a flexible procedure, and at any time the judge can ask another expert to comment on the other’s evidence, and even pose questions.
The judge will then invite the parties’ representatives to ask questions. This is not intended to be a cross-examination (or re-examination) of the witnesses, and the questions are to test an expert’s views and elicit clarification of it. The Practice Direction expressly provides that the representatives should not cover ground which has already been fully explored.
Once the parties’ representatives have completed their questioning, the judge will summarise the experts’ views on the issue, and ask them to confirm or correct his summary.
The first case after the formalisation of the process in which the evidence of valuation experts was heard concurrently was Swain v Swains Plc, a case which produced three judgments:  EWHC 660 (Ch),  EWHC 1183 (Ch) and  EWHC 2585 (Ch) in which each author of this article represented one of the defendants. Some years prior to his unexpected death during a routine heart procedure in Thailand, Christopher Swain had distributed shares in his company Swains Plc to his daughters. His intention was to provide his children with an income in a tax-efficient way through dividend payments. However, he wished to retain a degree of control over the shares, and transferred them subject to option agreements granted in favour of the Swain Employers’ Trust under which the trustees could purchase the shares at a ‘fair value’ such value to be ‘determined by the auditors for the time being of the company acting as experts not arbitrators having regard to all the circumstances’.
The trustees of the trust were his long-standing accountant, Neil Kirby, and his solicitor, David Berry. Mr Kirby and Mr Berry were also appointed as executors of Mr Swain’s estate, and after his death made a distribution of the shares held by Mr Swain to his daughters. At the time, the estate was involved in proceedings against Mr Swain’s former solicitors, Mills & Reeve (which resulted in the well-known judgment in Swain Mason v Mills & Reeve  EWCA Civ 14), and the executors were concerned about their ability to meet any costs order made against them in that litigation. They, therefore, distributed the shares to the children subject to further option agreements on similar terms.
In 2012 Mr Kirby and Mr Berry exercised the options over the shares at the same price they had agreed to accept from the purchaser from them. Three of Mr Swain’s daughters brought proceedings against Mr Kirby and Mr Berry for conspiracy. The claimants were successful in having the valuation of the auditors set aside, and the court had to determine the ‘fair value’ of the shares.
Although the valuation in Swain was not taking place within unfair prejudice proceedings, the court adopted the same approach as it would do in a claim pursuant to Section 994 of the Companies Act 2006. The court was seeking to determine the fair value of the shares, and had to consider what discount, if any, should be applied to the shareholdings, and whether the sisters’ respective shareholdings should be aggregated for valuation purposes so that together they held a majority stake in the company.
Advantages for the parties of hot tubbing
In our view, there are two potential advantages for the parties in having expert evidence received in the hot tubbing format.
- First, the process can save appreciable amounts of court time.
- The agreed agenda continues the process of clarifying the issues remaining in dispute between the experts into the way in which those disputes are going to be explored in oral evidence at trial.
- Furthermore, the questions arising from the agenda come principally from a single source, the judge, and he or she asks open questions: there is less time spent on getting to the nub of the issues. Given the focus of the agenda on particular issues, the scope for general cross-examination going to credit is also cut down (although it is of course still possible). In the Swain’s case, receiving expert evidence from three experts via hot-tubbing saved at least two days of court time and probably more.
- Second, the open questioning format can really permit an expert to shine and gain the trust of the judge. The judge’s questions take the form of a seminar, with each expert answering the initial question sequentially, and then the judge seeking clarification from the experts as his or her understanding of the point develops. The really competent expert can give the court a great deal of assistance in a format such as this; and the format also gives the judge the opportunity to form a view of the credibility and reliability of the experts based on the way they handle nuances arising from the seminar format of questioning.
Disadvantages for the parties of hot tubbing
The principal disadvantages of the process are closely allied to the advantages we have identified above.
- In hot tubbing, counsel has far less control over the expert witness than in the traditional format; there is reduced scope for a flexible cross-examination (particularly as to credibility) that creates opportunities to undermine the expert’s evidence, because so much more of the questioning comes from the judge. The scope for the advocate to respond creatively to blunders made by an expert is reduced (although not entirely removed).
- Hot tubbing creates the opportunity for a variety of group think among the experts and the judge as they explore issues together. A bad expert with a bad point can adjust his or her views as he or she sees which way the judicial wind is blowing, preserving credibility generally which might, in the traditional format, have been badly damaged as a poor point was exposed. There is also probably an increased likelihood the judicial instinct to find a middle ground between extreme positions will be exacerbated by the hot tubbing method, as judges seek to persuade experts to coalesce around a sensible compromise view.
- Perhaps most significantly, you cannot talk to your expert about the other parties’ expert evidence as it is given. This inability to check points with one’s own expert before putting them to the opposing experts in the limited window for cross-examination means that advocates have to be confident that they have mastered the issues arising within the expert evidence before the hot tubbing itself commences.
When to start thinking about hot tubbing
It is best to start thinking about hot tubbing as early as possible in the litigation process, and should be something that is considered at the time of appointing an expert. The process of giving evidence concurrently is so different from the more normal situation where an expert is cross-examined that different considerations apply. It is a more consensual process, and it is vital that the expert is seen to participate fully with the procedure rather than stubbornly repeating the views set out in their report.
Having said that, it is also important that the expert should not fall into agreeing with the judge and the other experts. The process is designed to help build a consensus rather than testing opposing views by cross-examination. It can affect the evidence given by an expert who might be more willing to disagree with a party’s representative than the judge. In the more antagonistic atmosphere of a cross-examination, an expert is more likely to defend their position than if they are being asked to express their opinion by the judge.
Although consideration should be given to the possibility of hot tubbing when choosing an expert, no final decision can be able to be made until the expert evidence has been exchanged and a statement of issues on which they agree and disagree has been produced. It is at that stage that the areas of dispute can be identified and the nature and extent of the disagreement between the experts determined. Only then can an informed decision be made as to the appropriateness, or otherwise, of the experts giving their evidence concurrently.
Making an application for evidence to be heard by hot tubbing
An application for a direction that the experts give their evidence concurrently can be made at any stage of the proceedings. It is unlikely, however, that a judge will make such an order before the pre-trial review. Just as the parties will not be able to make a fully informed decision about hot tubbing until there has been a discussion between the experts and they have produced a joint statement of issues on which they agree and disagree, the Court will not be in a position to make a decision until it is in possession of all the facts.
Even at the pre-trial review, there will be a reluctance to bind the hands of the trial judge (unless they are hearing the PTR themselves). More often than not, the judge will only direct that the parties agree an agenda for the taking of evidence concurrently, and leave it to the trial judge to make the final decision.
The trial judge will, then, often be the one to make a decision on hot tubbing at the beginning of the trial itself. However, he can do so at any time, even whilst the trial is continuing. Prior to the amendments to the CPR it was possible for the parties to agree that some of the experts’ evidence should be given conventionally with them being cross-examined, and part of it concurrently: see Harrison v Shepherd Homes Ltd  EWHC 1811 (TCC) at . There seems no reason why the court could not adopt a similarly flexible approach now.
There is no need to make a formal application for evidence to be heard concurrently, and there will rarely be a need to file evidence in support of such an order. It will, however, be necessary to persuade the court that such a direction is appropriate and furthers the overriding objective. This is likely to be the case where the evidence is lengthy and technical, and there is a real prospect of saving court time.
In Swain the Claimants’ expert report ran to nearly 300 pages (including appendices), and if the experts were cross-examined, their evidence was estimated to take 3 days. On the basis that the experts’ evidence could be concluded in a day if they gave evidence concurrently, the trial judge made the direction.
Three points to take away about hot tubbing
From our experience in Swain, the take home points about hot tubbing are these.
- First, remember that hot tubbing is always a potential method by which your expert’s evidence is going to be received. When selecting an expert, bear in mind that he or she might have to give what is effectively evidence in chief to the judge. A good expert (i.e., one that is intelligent, expert, sensible and good natured) will have no difficulty with this; but the more peppery sort of expert could come badly unstuck.
- Second, if hot tubbing looks possible, be prepared to invest a lot of time into preparing the agenda for the session, seeking to help get the judge to the point where he or she appreciates the failings of the other side’s expert(s).
- Third, during the hot tubbing questioning itself, pay close attention to the way the evidence is emerging and how the judge’s understanding appears to be forming. The rather limited scope for cross-examination or re-examination of experts after judicial questioning on an agreed agenda – and the fact that you cannot check any points with your own experts – means that your questions must be extremely well thought-through in order to be effective.
Paul Mitchell QC and Nigel Burroughs
4 New Square
About the Authors
Paul Mitchell QC specialises in commercial litigation arising from the negligence of people holding themselves out as skilled (lawyers, accountants, fund managers, taxation advisers, company directors, etc); claims arising from earlier litigation (including in particular claims for malicious prosecution of earlier claims or seeking damages for abuse of process); claims involving jurisdictional issues; and in particular claims where the examination of expert witnesses is central to a client’s prospects of success. He has been highly ranked in the directories for many years in the field of professional liability claims, and regularly acts in disputes between family members regarding the management, control and ownership of private limited companies in various sectors.
Nigel Burroughs is an experienced commercial litigator, with particular expertise in company and insolvency matters. He has conducted contested share valuations before courts and expert arbitrators, often dealing with the impact of breaches of fiduciary duty and misfeasance on the valuation exercise. Nigel has been described in the directories as ‘great fun to work with, offers commercial and pragmatic advice’ and as someone who ‘can hold his own against QCs’.