Company Valuation in Shareholder Disputes

Grievances and disputes arise most often among minority shareholders. Complaints concern things like directors receiving excessive remuneration, failure to pay dividends, and misuse of company assets. 

A minority shareholding may not offer recourse via the shareholder’s agreement or company articles. One option is for the majority to buy the minority’s shares at a fair value, but establishing a fair value can often lead to another dispute.

Our commercial litigation team act in a wide variety of shareholder, partnership and LLP disputes across the country, typically arising from or involving, some conduct that amounts to unfair prejudice in breach of companies act 2006. This article looks at the common causes of shareholder disputes and how feuding company members can find an equitable solution to establishing a fair company value.

What Is a Valuation Dispute?

A valuation dispute is a disagreement over the fair or equitable market value of company shares. The issue of valuation is frequently central to shareholder disputes.

Share valuations have many drivers. It’s possible to reach different valuations depending on the method used, the addition or omission of different variables, and the standpoint of the valuer, or more accurately, the person they represent.

What Is Section 994?

Section 994 of the Companies Act 2006 protects company members and shareholders from unfair prejudice, particularly minority shareholders who may suffer the consequences of mismanagement by other members or the company’s directors.

A shareholder can use Section 994 to support a petition to the court for an unfair prejudice order on the basis that the company is conducting its affairs in a way that is unfairly prejudicial to member interests, including affecting share value.

Section 994 also supports an application if an omission on the part of the company would be prejudicial.

A successful Section 994 application can allow the court to prescribe company operations. 

However, therein lies the issue; courts are reluctant to interfere in company management, so it’s hard to succeed with this application. But just the threat of invoking Section 994 can create leverage and strategic advantage.

Understanding Shareholder Disputes

Because similar issues often arise in shareholder disputes, experienced lawyers frequently encounter the same points of conflict.

Common Causes of Shareholder Disputes

Opposing views on company direction and financial and strategic goals, such as:

• Disagreements over decisions made by the management team or key company officers.
• Disputes over the retention of earnings, the allocation of profits, and the distribution of dividends, where reality and expectation don’t match.
• Breach of their fiduciary duties by directors or officers of the company, centring on mismanagement or conflicts of interest.
• Unequal treatment of shareholders, for instance, differences in access to key financial information.
• Disputes over voting rights or dilution of shares.
• Disagreements over the wording in shareholder agreements or the interpretation of wording in the Articles of Association, including valuation clauses.
• Shareholders alleging an unfair valuation of their investments.

Valuation Methods for Business Valuation

There are different defined methods, but principally three exist: the income-based approach, the market-based approach, also called the discounted cash flow basis, and the asset-based approach.

Business valuation is an expert area typically performed by specialist or forensic accountants.

Capitalised Maintainable Income Approach

If the business is a going concern, then the most common method of valuation is the capitalised maintainable income approach. 

This analysis involves working out the value of the business based on current earnings and anticipated future performance, and uses a multiplier relevant to the sector and the business size.

Challenges in Business Valuation

The inherent challenges lie in the numerous variables like unpaid dividends, discounts based on the minority interest, and adding in losses, all of which are arguable depending on whether you are the buyer or the seller.

Competing Interests in Valuation

In any business valuation, one party is usually interested in the highest possible figure, and the other, the buyers, favour the lowest possible valuation.

A business valuation is inextricably linked to share price, and shares form a currency between two opposing parties with conflicting interests.

Expert Evidence and Court Discretion

A court cannot provide its own business valuation. However, it can adjudicate on independent valuations regarding their legitimacy or order a valuation if there isn’t one. 

There is plenty of case law on the subject to act as precedent, but no defined guidelines; each scenario or dispute is different.

The court will place more emphasis on a valuation from an expert accounting firm with an established history and strong professional reputation. There is also always a strong bias towards evidence-based rather than theoretical valuations.

How Business Valuation Helps with Shareholder Dispute Resolution

Business valuation provides an impartial assessment of a company’s worth, which is vital in a dispute where shareholders allege their investment is unfairly valued.

This information is also pivotal to all kinds of transactions like acquisitions and mergers, or other events where there is a change of control and disagreement amongst members about the share price.

Frequently Asked Questions

What Happens if 50/50 Shareholders Disagree?

A 50/50 is a deadlock, and a split vote like this can cause significant problems if the proposition is key for the company’s management. It’s ideal to construct a shareholding arrangement so this can’t happen; one party should have a casting vote. The company’s Articles of Association should cover what happens when a split decision is made.

How Do I Calculate the Value of My Shares in a Company?

You’ll need to multiply the current market price per share by the number of your shares. The market price can be found on stock market apps or financial websites. Multiply this value by the number of shares you own for the total value of your investment. You should also refer to the shareholder agreement.

What Is the Valuation Clause of a Shareholder Agreement?

The valuation clause in a shareholder agreement provides details on who can buy and sell shares, and the mechanism used to determine the share price. The clause may also include the valuation process. It’s essential that the wording of a valuation clause is precise and not vague, which can be subject to argument.

Enlisting Professional Support for Company Valuation

Business valuation is as much an art as a science and an essential tool for shareholders to know precisely how much their investment is worth in a dispute. 

Professional input is vital and as early as possible to stop disagreements from escalating. The aim is to arrive at a valuation that all parties agree on, which paves the way for a speedy solution to the current conflict.

Shareholder litigation and unfair prejudice petitions are a specialist legal area. Frequently the facts and the law are complex and there is nuance regarding how and when to approach certain aspects. Where there is urgency we can move quickly. Our technology and experience enables us to quickly assess a situation and to promptly advise on the best and most appropriate way forward. We have a specialist commercial litigation team recognised nationally, often referred to by other solicitors and barristers. We understand the complexity in shareholder disputes and are well placed to help. Acting aggressively at the right time can create pressure and early strategic advantage and is something we put at the forefront of our client representation, including the use of injunctions to protect our clients’ position wherever necessary and appropriate/proportionate. If you think you are in a shareholder dispute or might be approaching one contact a member of our commercial litigation team now to discuss your situation. We act nationally and would be happy to assist you.