Valuation issues in shareholder disputes
In last week’s blog we looked at the concept of “Fair Value” in the context of an unfair prejudice petition. This week we look at the different approaches to valuation that may be taken by the Court in the context of a shareholders’ dispute. We will be addressing these valuation issues in more detail in our forthcoming seminar on 2nd April.
Bases of Valuation
Assuming the shares of one shareholder will be sold to another, what are the principles of valuation to be applied? We will consider the different approaches to valuation, and how they can impact substantially on the result. From the client’s perspective, this is what the whole expensive process has been about.
What are the different approaches to valuation?
The usual method is the P/E ratio approach, assuming a going concern rather than a breakup basis, but it is riddled with potential traps when it comes to deciding what should be the maintainable earnings, what would be the appropriate multiplier and whether published stock indices can provide any useful guide at all in that regard. In one case (Planet Organic Ltd) the valuer sought to apply the sorts of multiples relevant to smaller quoted supermarket chains to a company trading from one shop in south London. The judge said
“The truth is however that these companies are nothing like Planet Organic, a little shop with a big name…”.
We will look at the reasons why quoted companies can expect to be valued on higher multiples of earnings than smaller private companies.
What adjustments have to be made to a valuation?
We will also consider what adjustments have to be made to a P/E based valuation, for example for surplus cash and directors loan accounts. We will be looking at how to draw the line between the occurrence of contingencies such as a change in the market which are not admissible in evidence if they occur after the valuation date, and facts or events subsequent to the valuation date which enable a valuer to assess the state of affairs which actually existed at the valuation date.
We will consider whether in certain cases a different basis of valuation is in fact more appropriate to achieve a fair result. Dividend based valuation is not appropriate for private companies, but very occasionally cash-flow and asset based valuations can be.
The issue of whether or not a minority discount should be applied is one of enormous significance – in one case a 49.96% shareholder saw her shares discounted by 30% to reflect the fact that she held less than 50% of the issued share capital. We will look at the sort of discounts that can apply and in what circumstances.
The role of the expert accountant
Finally, but importantly from a practical perspective, we will consider the role of the expert accountant who is instructed to provide a valuation for the court (whether as a single expert, or as one of two ‘opposing’ experts), and thereafter to appear in the witness box to justify his approach, what that expert might expect to face in court and how to prepare for it.
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You are strongly advised to obtain advice from a solicitor about your specific case or matter and not rely on the information or comments in this article.