In Short
- Valuing private company shares in shareholder disputes is complex. It depends on factors such as financial performance, assets, liabilities, and the circumstances surrounding the dispute.
- A clear Shareholders’ deed can eliminate uncertainty by setting out valuation methods, procedures, and triggers (e.g. exits, breaches, disputes).
- Engaging an independent, qualified valuer ensures objectivity and can help avoid drawn-out, costly conflict.
Tips for Businesses
Keep a well-drafted shareholders’ deed in place and update it regularly. Maintain accurate financial records, conduct regular valuations, and establish relationships with qualified valuers, so you’re prepared if a dispute ever arises.
Shareholder disputes put significant pressure on a business. When relationships break down, emotions rise and interests clash. The parties must reach a fair outcome to protect the company and its owners. A significant issue is the value of the shares. Disgruntled shareholders often want to leave the business. Their exit turns valuation into a central point of conflict. This article outlines how share valuations operate in dispute scenarios and explains the importance of preparing in advance to avoid unnecessary time, expense and stress.
The Challenge of Valuing Shares During Disputes
When shareholders are in dispute, determining share value becomes complex. Unlike shares in publicly listed companies that trade on the stock exchange with transparent market prices, private company shares require careful assessment considering multiple factors:
- the company’s current financial position and historical performance;
- assets, liabilities, and cash flow projections;
- market conditions and industry trends;
- the specific circumstances surrounding the dispute; and
- the rights and restrictions attached to different share classes.
Additionally, questions also arise about access to company information, the reliability of financial records, and whether certain parties have been acting in the company’s best interests.
Understanding Different Valuation Approaches
Professional valuers typically employ several methodologies when assessing shares in dispute situations:
- Fair Value Assessment: This focuses on determining the worth of shares at the specific point when the dispute crystallised. The approach captures the company’s position at that moment in time, without speculating about future performance or market movements.
- Fair Market Value: This takes a broader perspective, considering not only current circumstances but also the company’s growth potential and future earnings capacity. This method reflects what informed parties might reasonably pay in an arm’s length transaction.
- Net Asset Value: This focuses on the company’s tangible worth, its assets minus liabilities, and provides a floor value, but may overlook intangible assets such as goodwill, customer relationships, or intellectual property.
- Earnings-Based Valuations: This examines the company’s profit-generating capacity, using methods like capitalisation of earnings or discounted cash flow analysis to determine value based on expected returns.
The Critical Role of Shareholders’ Deeds
These challenges underscore why a well-drafted shareholders’ deed is invaluable for any company. A comprehensive shareholders’ deed should clearly outline:
- Valuation Methodology: By specifying valuation methods for each scenario, parties eliminate guesswork and reduce the risk of disagreement.
- Valuation Process: This defines who values the shares, the required qualifications, timelines, and steps for obtaining a second opinion.
- Dispute Resolution Mechanisms: This establishes procedures for handling valuation disagreements, including expert determination, mediation, and arbitration.
- Information Access: This ensures all parties have appropriate access to company records and information necessary for accurate valuations.
- Triggering Events: Those that clearly define when share valuations apply, including voluntary exits, disputes, breaches of duty, and other events.
A well-structured shareholders’ deed provides a roadmap for valuing shares before emotions and conflicts cloud judgment. It creates certainty, reduces costs, and ensures fair treatment for all parties.
When Professional Expertise Becomes Essential
While shareholders’ deeds provide the framework, professional valuation expertise remains crucial. Qualified business valuers bring:
- objectivity;
- technical expertise;
- market knowledge;
- ability to explain and defend valuations in mediation, arbitration, or court.
The cost of professional valuation services is typically far less than the expense of prolonged disputes, legal proceedings, or unfair outcomes that can destroy business value and relationships.
Preparing for the Unexpected
Smart business owners recognise that shareholder disputes, while undesirable, are a realistic possibility. Preparation involves:
- Implementing Shareholders’ Deeds: Before conflicts arise, establish clear procedures and methodologies for share valuations.
- Regular Business Valuations: Periodic professional valuations help establish baseline values and identify trends, making dispute-related valuations easier to conduct.
- Maintaining Accurate Records: Ensure that the company’s financial records, board minutes, and key agreements are properly maintained and accessible.
- Professional Relationships: Establish relationships with qualified valuers, lawyers, and accountants before they’re needed.
- Clear Communication: Regular shareholder meetings and transparent communication can help prevent minor disagreements from escalating into major disputes.
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Key Takeaways
Shareholder disputes involving share valuations are complex and potentially expensive. However, with proper preparation through shareholders’ deeds and access to professional valuation expertise, businesses can navigate these challenges more effectively.
The key is addressing these issues before they become problems. A well-drafted shareholders’ deed that clearly outlines valuation processes, combined with professional guidance when needed, provides the foundation for fair, efficient dispute resolution that protects all parties’ interests and preserves business value.
If you have any questions, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Because private company shares lack a market price, valuers must assess financial performance, risks, and the circumstances of any dispute.
It sets clear valuation methods, processes, and triggers, reducing uncertainty and the risk of costly disagreements.
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