Managing Financial Complexity in Mediation

Achieving the resolution of a dispute via mediation can sometimes require navigating through complex financial matters. In such cases it can be easy to become bogged down in the minutiae, which might impede the process or derail it altogether. Adopting a number of general principles can help to maintain the momentum of discussions, avoid deadlock, and keep a range of options on the table as an overall resolution is developed.

Apples and Oranges

The sudden realisation that financial comparisons have not been made on a like-for-like basis can represent a substantial set-back on the mediation day. The most obvious (and surprisingly frequent) example is a failure (in cross-border matters) to set a base currency, and to stick to it. Checking at each stage for currency consistency is a simple but effective way to avoid this pitfall.

For pension plans, the cash-equivalent transfer value (CETV) offers arguably the best means of comparison. However, for UK schemes the range of potential outcomes for defined benefit and defined contribution needs to be highlighted (and the services of a specialist advisor may be mandated); and for overseas schemes (e.g. the CPF in Singapore), local regulations need to be understood.

When calculating future income needs, the Duxbury “pot” (essentially an annuity value based on longevity and inflation) is much beloved of UK lawyers and Courts alike. However, the numbers need to be treated with a pinch of salt, especially when making international comparisons (where tax considerations can make a substantial impact). In some – but by no means all – major jurisdictions, market prices for annuities may provide a useful reference point.

Keeping Your Options Open

Employee stock options often form a significant component in determining the distribution of assets. For “in-the-money” option positions (i.e. those where the strike or exercise price of the option exceeds the current underlying stock or asset price), the intrinsic value (i.e. strike price less current stock price, all multiplied by the number of shares) is a good valuation proxy. For “out-of-the-money” positions, a simple desktop calculator (e.g. a Black-Scholes formula) might be applied. However – and crucially – vesting criteria have tightened substantially in recent years, and therefore a view on the likelihood (or quantum) of vesting needs also to be applied in both instances.  

Liquidity vs Divisibility

In some instances (a good example being “bundled” financial instruments where elements of both “mark-to-model” and actuarially driven valuations have been combined), achieving an agreed valuation may be challenging – and cash-in values unattractive. Where this is the case, the divisibility of the asset or product in question may be the answer. If the asset can’t be valued, explore the possibility of sharing it.

It’s Not Just About the Number

Finally, it is always worth bearing in mind – especially where negotiations appear to be heading for stalemate – that the final key to a settlement may lie in a non-financial element. This applies to complex cases as well as more straightforward ones. By keeping discussions fluid (perhaps by applying the principles above), the mediator can keep open the search for such a key to unlock the negotiations.

In summary

A financially literate mediator can assist the parties to a dispute by encouraging them to ensure that fair principles of valuation and comparison are being employed. As always, the beauty of mediation is the scope for creativity in designing a solution; the confidence of the mediator in managing the complexity of the matters at hand will play a large part in arriving at a successful outcome.