In post-acquisition disputes involving allegations of misleading or deceptive conduct, the concept of "true value" often plays a central role in the quantification of loss. Unlike standard valuation methodologies grounded in valuation principles, true value is a legal construct - defined and applied by courts for the purpose of assessing damages. Understanding the concept of true value is especially important for lawyers as they work with expert witnesses on damages matters relating to misleading or deceptive conduct.
This article outlines the meaning of true value in the Australian legal context based on our experience, how it differs from market value, the accepted role of hindsight, the treatment of supervening events and practical considerations for legal advisors when instructing valuation experts.
Defining "True Value" in a Legal Context
Although true value is not a term used in accounting standards, corporate finance or in the International Valuation Standards, it is used frequently in litigation in Australia. The concept of true value is a legal construct, most commonly in the context of claims brought under the Australian Competition and Consumer Act1 (e.g., damages for misleading or deceptive conduct).
True value for the purpose of assisting the court with its assessment of loss and damage is therefore not restricted to the "standard" valuation principles. One key difference is that traditional valuations do not have regard to information arising subsequent to the valuation date. In contrast, an assessment of loss often relies on information arising after the event in question. Accordingly, in cases of misleading or deceptive conduct, information coming to light after an acquisition can be used to assist the court in assessing true value as at the acquisition date.
The courts have used various expressions, such as "real value," "actual value" and "intrinsic value" to refer to this concept. Broadly, they refer to the actual worth of an asset or interest at a point in time, determined on a counterfactual basis (i.e., had the alleged misconduct or misleading disclosure not occurred).
The case often referenced for a definition of true value is Potts v Miller (1940) 64 CLR 282,2 a foundational High Court of Australia decision regarding the assessment of damages for misleading conduct. The plaintiff (Potts) alleged that he was induced by false representations made by the defendant (Miller) to underwrite and purchase shares in a company. The shares subsequently became worthless.
The Court established that "the measure of damage in a case in which a person is induced by fraud to take up shares in a company is the difference between the amount he paid for the shares and the real value of the shares at the time of allotment, and not at any subsequent period,although subsequent events may throw light on the value at the time of allotment."
In relation to subsequent events, the Court further established it was necessary to:
Use of Hindsight
Potts v Miller and subsequent authorities confirm that, when assessing damages for deceit or misleading conduct, courts may use hindsight to determine the real value of what was received, provided that subsequent events are taken into account where their impact goes to a diminution in value that is intrinsic to the asset at the time of the transaction, and not to a diminution caused by an extraneous or supervening event.
In assessing loss, courts often use hindsight - that is, they consider events that occurred or became known after the event to assess the financial impact of the event to the plaintiff. A typical assessment of loss compares the financial position of the plaintiff before and after the event. In a post-acquisition dispute, this translates to using events arising or becoming known after the acquisition date to determine the true value of the asset as at the acquisition date. This use of hindsight is a key difference from a traditional "market value" assessment, which is based only on information known or knowable at the valuation date and does not allow the use of hindsight.
For example, if a business's financial performance shortly after the acquisition reflects the crystallisation of pre-existing operational weaknesses or risks that were known but not disclosed, that subsequent performance may be relevant to quantifying the financial impact of the non-disclosure.
The rationale is that subsequent events may reveal facts about the asset that were not (but should have been) disclosed at the time of acquisition, or may reveal the financial impact of a misleading or omitted disclosure, thereby informing the assessment of its true value at that historical point in time.
As set out in Potts v Miller, the use of hindsight is not unrestricted. Courts draw a clear distinction between:
- Events or outcomes that are reflective of the asset's inherent characteristics at the time of acquisition (generally admissible)
- Supervening or extrinsic events that are unrelated to the condition, nature, or reasonable use of the asset (generally inadmissible)
This distinction is critical when assessing whether post-acquisition performance or developments may be relied upon in support of a valuation opinion.
Supervening Events
Not all subsequent events are relevant to the assessment. Only those that relate to the intrinsic qualities or characteristics of the asset at the time of acquisition can be considered. Supervening events are external, unforeseen developments that arise after the transaction and are not attributable to the underlying qualities of the asset (or to the misleading conduct). Examples may include:
- Loss of a contract after the acquisition date and unrelated to the alleged breach
- Natural disasters (e.g., bushfires, floods)
- Pandemics (e.g., COVID-19)
- Regulatory changes
- New market entrants or macroeconomic shocks
The identification of extrinsic events is crucial for in assessing true value in the context of misleading or deceptive conduct. In general, courts exclude the impact of such events from the assessment of true value, on the basis that they do not assist in determining what the asset was worth at the time of acquisition. They are not relevant to the calculation of damages under misleading conduct claims where the focus is on counterfactual value.
The parsing of information between 'intrinsic' and 'extrinsic' may sound simple. However, separating losses attributable to the alleged conduct from those caused by supervening events actually requires a detailed forensic analysis. Some cases are 'black & white', while others involve many shades of grey. Identifying relevant facts requires a careful analysis of the evidence, and professional judgement is needed to consider complex counterfactual assumptions and scenarios.
Examples
Below are some recent examples illustrating the range of complexity in assessing "true value".
In a 'straightforward' example, a vendor represented that it had an ongoing contract with a customer, which was subsequently found to be false. In this instance the true value could be assessed by valuing the business, but excluding the impact of the revenue from that specific customer.
In other contexts, excluding supervening events is more challenging. In another example, the vendor misrepresentation related to the 'quality', rather than the existence, of key contracts. After completion of the transaction, the business was integrated into the purchaser's operations, and new management made a number of 'operational' decisions. The business was also impacted by a market downturn and other external factors. The reason for the diminution in value of the business since completion was obscured. Was the poor performance related to the inherent quality of the contracts as at completion that should have been disclosed (for which the vendor is liable), or due to decisions by the new management team or market changes (for which the vendor is not liable)?
Once the business is integrated and its performance is altered by the purchaser's decisions, it becomes difficult to isolate the intrinsic value at the time of sale from the impact of the external factors.
Conclusion
In practice, true value assessments arise frequently in misrepresentation claims in Australia.
The assessment of true value in post-transaction disputes presents distinct legal and valuation challenges. Unlike standard market valuations, true value requires consideration of legal principles regarding causation and the use of hindsight. Where supervening events have occurred, the assessment of true value will often depend on assumptions and/or instructions, and therefore the reliability of the valuation opinion will be subject to scrutiny.
Lawyers play a critical role in guiding expert witnesses when assessing true value in legal disputes, especially in cases involving misleading or deceptive conduct, by providing clear instructions and context that help the expert distinguish between relevant hindsight and supervening events.
When assisting an expert to assess true value and distinguish between hindsight and supervening events, lawyers should seek to provide the expert with comprehensive information about the asset, the relevant market, and all significant events or circumstances. This enables the expert to accurately identify which subsequent events are supervening and which are truly intrinsic to the asset or transaction under review.
Footnotes
1. Competition and Consumer Act 2010 (Cth) sch 2. https://www.legislation.gov.au/C2004A00109/latest/versions
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
