Fair Value in Shareholder Disputes
In last week’sblog we looked at some of the tactical considerations which shareholders ought to bear in mind when considering unfair prejudice litigation. This week and next week in considering various aspects of shareholders’ disputes we get to what it has all been about – the money.
Will a buy out order be made by the court?
The lawyers have had their interesting debates on the finer points of law and have considered if there has been unfair prejudice within the meaning of the relevant statute, and whether if there has, the court will make a buy out order.
The client may be excused for wanting to know before all those legal costs are incurred, what it is that he might stand to gain or lose from them, depending on which side of the case he finds himself. This will involve considering whether or not a buy out order will be made, and if so whether the shares to be sold will be valued pro-rata, or have a discount applied to them if they constitute less than 50% of the issued share capital. It will involve considering the processes for valuation – whether by an independent accountant or a judge and what differences there are between them.
What do the courts mean when they say “fair value”, and what does an accountant mean?
Since the case of Re London School of Electronics in 1986 the courts have held that the overriding requirement is that the valuation should be fair on the facts of a particular case. In the same year the Court of Appeal in Re Bird Precision Bellows Ltd specifically rejected the submission that the court was constrained to make an order for the purchase of shares only at the market price, to be arrived at by ordinary valuation principles. Instead the Court of Appeal made it clear that the court has a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company.
Where does this leave the expert accountant tasked with valuing the shares?
The first point to note for the valuer is that where unfair prejudice occurs in respect of a “quasi partnership” then “fair value” means that no minority discount is applied at all. Therefore the question of what is a “quasi partnership” is fundamental because if it is not such an entity then swingeing discounts will be applied for a minority holding. A quasi partnership is a company where the participators have an agreement or understanding that each is to take part in the management of the company and that agreement is breached, normally by the minority member being removed from office as director.
It is also important for the client to ensure that an expert accountant is involved sooner rather than later in the litigation process. This will involve carefully considering the right type of expert to engage and trying to ensure that the expert might be able to draw on his own experience of comparables in reaching an initial valuation.
Next Week’s Blog
Next week we will consider the different bases of valuation that might be employed. The forthcoming seminar to be held on 2nd April will develop and detail valuation aspects of unfair prejudice petitions in particular.
To book your place at the seminar, email firstname.lastname@example.org or call (020) 7467 3980.
Written by barrister Hugh Jory, of Enterprise Chambers
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