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Valuation of shares

Valuation of Shares

Many of the difficult issues that arise in shareholder disputes revolve around the valuation of the minority shares.  Normally, the Court (with the assistance of expert evidence) is striving to arrive at “a fair value”.  As with most shareholder disputes the starting point has to be the Articles of Association and/or any Shareholders Agreement, which may provide a mechanism by which a fair price is to be calculated.

Very often expert forensic accountancy advice will be taken on the valuation of the Company’s shares.  The expert is almost invariably confronted by a number of matters to consider. 

Firstly, the basis of valuation – a net asset basis focuses on the value of the Company’s assets (land and buildings, plant and machinery, intellectual property and so on) whereas the earnings basis looks at the turnover and profit generated historically and prospectively by the Company’s activities.

Secondly, the expert must address the date of which he should value the shares, whether it be the Company’s last year end; the date when the unfair conduct began or ended; or the date of Trial.  Huge difference in value can occur between these three, where for example business has been diverted away from the Company by the misbehaving director/shareholder.

Finally, the issue must be addressed as to whether the value of the shareholding should be discounted simply because it is a minority shareholding (and so the owner cannot control the decisions taken on behalf of the company).  A discount may be appropriate where the minority shareholder has been culpable in some way or where he wishes to sell voluntarily.  However, where the shareholder is being excluded from participation in the management of the Company the Court may well exercise its discretion by not discounting the value of the shareholding.

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