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A shareholder dispute can be one of the most challenging situations a business owner may face. Shareholders are the backbone of any company, influencing major decisions that direct the business’s course. While the majority of shareholders have the power to determine the direction of the company, disagreements often arise, especially when decisions are perceived as damaging, unfair, or detrimental to the company’s growth. A shareholder dispute typically emerges when a minority shareholder disagrees with the majority’s actions, or when the decisions made by controlling shareholders are seen as poor, fraudulent, or harmful.
In some instances, a shareholder dispute may escalate to the point where a shareholder feels compelled to exit the company, whether due to personal disagreements or business concerns. When this happens, the question arises of how to resolve the situation in a fair and equitable manner. This process often involves selling shares, which, while seemingly simple, can be complicated due to valuation issues.
Let’s dive deeper into how a shareholder dispute affects valuation and what challenges you may encounter when determining the value of shares during such a dispute.
Types of Shareholder Disputes
There are various types of shareholder disputes, and the nature of the dispute often determines how the company approaches the valuation process. Two of the most common types are:
- Dissenting Shareholder Disputes – This occurs when a shareholder disagrees with a significant decision made by the majority, such as mergers, acquisitions, or other major changes to the company structure. If a shareholder feels that their concerns are not being heard and that the company’s decisions no longer align with their interests, they may choose to leave the company.
- Minority Oppression – This occurs when the majority shareholders’ decisions are seen as oppressive or unfair to minority shareholders. Minority shareholders may feel excluded from decision-making processes, or they may feel that their interests are being deliberately harmed by those in control.
In both cases, the departing shareholder needs to sell their shares, but this process often becomes complex when it comes to assigning the right value to those shares. Valuation issues play a crucial role in these disputes, and a fair and accurate appraisal is essential for resolving the matter.
The Valuation Issues in a Shareholder Dispute
1. Case Determination and Legal Context
Before delving into the actual valuation process, it is important to identify the specific nature of the shareholder dispute. Legal definitions and the approach to resolving the dispute can vary depending on the jurisdiction, as each country or region may have different laws governing shareholder rights and the handling of disputes. For instance, the resolution of shareholder disputes may differ in cases of dissenting shareholders versus those involving minority oppression. Determining the case type is essential for selecting the appropriate valuation method.
2. Determining the Value of Shares
One of the primary issues in a shareholder dispute is determining the value of the shares being sold. This involves a careful assessment of the company’s financial position, assets, liabilities, and market conditions. A professional valuation is typically required to determine the fair price for the shares being sold. Without an accurate valuation, the exiting shareholder may not receive a fair payout, and the remaining shareholders may feel that the buyout is too costly.
There are several ways to assess the value of your business and the shares in question during a shareholder dispute:
- Fair Value: This method represents the value of the shares as of the date the shareholder decided to leave the company. It is generally used to reflect the market value of the shares at the time of the dispute. Importantly, the Fair Value does not take into account the future growth or market performance of the business.
- Fair Market Value: This considers not only the current state of the business but also its potential for future growth. The Fair Market Value is typically used when evaluating a shareholder’s shares in a broader context, such as when a company is preparing for a sale, merger, or acquisition. The Fair Market Value reflects the value that a willing buyer and seller would agree upon, taking future profitability into account.
- Fair Cash Value: This method focuses on the cash value of the shares and does not account for market volatility or growth prospects. It is a straightforward approach, but it may not fully capture the long-term value of the business.
- Investment Value: This approach is used to evaluate the shares based on their appeal to a specific investor. It considers the unique circumstances of the investor and their specific investment goals, but may not be applicable in all shareholder dispute cases.
Determining the right value requires expert input from a valuation professional, who can assess these various valuation methods and select the most appropriate approach for the specific circumstances of the dispute.
3. Determining Discount Levels
In many cases of shareholder disputes, there may be a significant difference between the Fair Value and the Fair Market Value of the shares. This discrepancy is known as a discount. The discount reflects the potential loss of control or liquidity that comes with exiting the company and is typically applied to the share price when a shareholder is selling their interest due to a dispute.
Whether or not a discount applies—and how large that discount is—depends on the nature of the shareholder dispute. If a minority shareholder is being forced to sell their shares under duress, the valuation may include a larger discount. However, if both parties agree on the valuation terms, the discount may be smaller or even waived altogether.
Valuation companies will carefully examine the specifics of the dispute to determine whether a discount is appropriate and, if so, how much it should be. This process ensures that both the exiting shareholder and the remaining owners are treated fairly during the buyout process.
The Role of Valuation Experts in Resolving Shareholder Disputes
Resolving a shareholder dispute requires more than just a basic understanding of financial statements or market trends. A professional business valuer can help navigate the complexities of the situation by providing a fair and accurate assessment of the company’s worth, the value of the shares in question, and any applicable discounts. By using objective valuation methods, experts can help prevent disputes from escalating and ensure that the process is fair for all parties involved.
Conclusion
A shareholder dispute can be a difficult and complex process, especially when it comes to valuing shares for sale. By engaging a professional valuation firm, you can ensure that the valuation issues surrounding the dispute are handled properly and equitably. Whether you are a minority shareholder seeking to exit the company or a majority shareholder looking to buy out your partner, understanding the value of the shares and the best valuation methods will help you navigate the dispute with confidence.
If you’re currently dealing with a shareholder dispute and need expert advice on valuation, get in touch with us today.
Adrien Giraud
Director – Business Improvement
P: +618 6315 2755
E: enquiries@wabusinessvaluations.com.au
Learn more about disputes at ASIC: Disputes about your rights as a proprietary company shareholder
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
Liability Limited by a scheme approved under Professional Standards Legislation