Complications of Business Valuation in an Unfair Prejudice Claim

Our specialist commercial litigation team act in shareholder disputes across the country. These often lead to ‘unfair prejudice’ claims and disputes; where one shareholder has been unfairly (unlawfully) treated in comparison to another. When shareholders are in dispute, particularly over claims of unfair prejudice, accurately valuing a business becomes crucial. Valuation in these contexts is not just a numerical exercise but a complex intersection of legal, finance, and strategic decision-making. 

Diverse methodologies and differing stakeholder interests can significantly complicate the valuation process. Understanding these complexities is crucial for any shareholder involved in or contemplating legal action. 

We have delved into some of the most common complications that arise during the valuation of a business in the context of an unfair prejudice claim. Contact Helix law today for expert legal guidance.

Basis for Valuation: Fair Value vs. Market Value

The choice between fair value and market value can fundamentally alter the outcome of a business valuation. 

‘Fair value’ 

Fair value is used in the context of claims and disputes to determine an equitable value for shares irrespective of market conditions. Unlike market value, fair value is typically calculated without considering minority discounts, which can otherwise reduce the valuation due to the lack of control or marketability associated with smaller share blocks.

Fair value reflects the true, intrinsic value of shares in a manner that is fair to all shareholders. This approach often involves adjustments taking into account current financial metrics, strategic positioning and potential future earnings of the company.

Market Value 

‘Market value’ determines what a willing buyer would pay a willing seller in an arms-length transaction, reflecting realistic sale conditions.

Market value is inherently more volatile and influenced by external factors such as economic climates, industry trends, and investor sentiments. In a scenario where shares are publicly traded, market value is typically more transparent through observable market prices. However, for private companies, market value estimations can be complex and require comprehensive market analysis.

Shareholder Agreements

Shareholder agreements govern company operations and assist in resolving disputes, especially in claims of unfair prejudice. These agreements are one important source document we look for, in addition to any other core items such as articles of association or loan agreements. It isnt unusual for these contracts to predefine valuation methods, outline specific circumstances that require share valuation, and detail shareholders’ rights and responsibilities. For example, they specify methods based on earnings multiples or asset values and trigger events such as retirement or shareholder disputes that necessitate a reevaluation of shares.

Particularly important are any tag-along and drag-along rights, which ensure fair treatment of minority shareholders during sales and impact share liquidity and marketability. The agreements might also dictate if minority discounts or control premiums apply, significantly influencing share valuation during transactions. 

In situations of unfair prejudice in breach of s.994-996 Companies Act 2006, how these agreements are interpreted can significantly affect the financial outcomes for minority shareholders. Perceived undervaluation or exclusion from decision-making can lead to allegations of unfair treatment.

Timing of Valuation

The timing of valuation is crucial in unfair prejudice claims, especially in volatile markets or after significant company changes. If a rogue opponent has taken steps to undermine (or which impact) value it stands to reason that that conduct will need to be disregarded, and so the timing of when a valuation is to take place by becomes critical. The “effective date” for valuation, whether when alleged unfair actions occurred or another time, determines the financial metrics used and, often, the outcome. These are the sorts of issues our commercial litigation team consider when acting for a shareholder investor in an unfair prejudice shareholder dispute.

Valuations may rely on historical financials, which provide a snapshot of past performance, or projected future cash flows, which speculate on the business’s potential earnings. Sometimes, historical and projected figures are blended to arrive at a more comprehensive valuation. The selected timing affects the financial data considered and can significantly impact the valuation outcome. 

For example, valuing a company right after a market downturn or before a major recovery can significantly alter its perceived value, affecting shareholders differently depending on their stake and the nature of the claim. It makes the timing of valuation a critical factor that needs careful consideration during legal disputes over shareholder equity and claims of unfair treatment.

Nature of the Business and Its Assets

The specific characteristics of the business and its assets can complicate valuations. Industries subject to rapid technological advancements or regulatory changes often face unpredictable future earnings, making financial projections complex. This variability influences valuation outcomes, particularly when the business’s value is heavily reliant on future growth prospects or innovation trajectories.

Valuing intangible assets like intellectual property, brand value, or goodwill requires considerable judgment and expertise from the valuer. These intangible assets, which may constitute a substantial portion of a company’s value, can be extremely challenging to quantify. 

Minority Discounts and Control Premiums

The application of minority discounts and control premiums is a particularly contentious issue in business valuations, especially in scenarios involving unfair prejudice claims. These adjustments reflect the actual power dynamics within a company. 

A minority discount reflects reduced control and marketability, leading to lower valuations. Conversely, a control premium is added when a share acquisition gives the buyer control, enhancing share value.

Determining whether and to what extent to apply these adjustments can become a major area of dispute in valuations tied to unfair prejudice claims. The challenge lies in fairly quantifying the impact on minority shares’ value without unfairly penalising minority shareholders or enriching majority shareholders. 

Final Thoughts

Navigating the complexities of business valuation amid unfair prejudice petitions (claims) requires a deep and tactical understanding of the various legal and financial elements that might apply. These are, in many ways, tools in our armoury to improve or protect your position. From choosing the proper valuation basis to interpreting shareholder agreements and considering the nature of the business. These factors collectively influence the equitable treatment of all shareholders involved and ultimately what an exit or settlement looks like in the context of a dispute.

If you are facing a situation where you re in dispute with a business owner, partners or other shareholders, contact our specialist commercial litigation team and we will be happy to assist you. At Helix Law we have a team with considerable strength in depth and experience in litigating unfair prejudice claims successfully.