Disputes between shareholders frequently end up before the courts under two main statutory routes: unfair prejudice petitions (sections 994–996 of the Companies Act 2006) and just and equitable winding-up petitions (section 122(1)(g) of the Insolvency Act 1986). In both scenarios, the valuation of shares is often the single most contentious and expensive issue.
Unfair prejudice - the usual remedy is a share buy-out
By far the most common outcome of a successful s.994 petition is an order that the majority shareholder (or the company itself) purchases the petitioner’s shares at a price fixed by the court. The default valuation basis under English law is fair value on a non-discounted basis, and only in some circumstances will a discount not be applied.
Key principles established by case law:
- No minority discount: unlike a willing-buyer/willing-seller valuation, the court will not normally apply a discount simply because the shares are a minority holding, unless certain circumstances apply.
- No discount for lack of marketability where the conduct of the majority forced the sale.
- Valuation date: depending upon the circumstances, fairness to the petitioner, and the discretion of the court, either the date of the court order or the date immediately before the unfair prejudice began.
Valuation methods accepted by English courts
Judges do not prescribe a single method; however, the general position is that expert evidence (usually from an independent accountant appointed on behalf of a single party or on a joint basis), will be prepared. Such reports tend to focus on a number of different methods to ascertain the value of the shares such as:
- Discounted cash flow (DCF): increasingly accepted for profitable, growing companies (especially technology or professional services firms).
- Maintainable earnings (capitalisation of future maintainable profits): the traditional method for established trading companies.
- Net asset value: common in property-holding or investment companies, or where the business is loss-making.
Where parties instruct their own experts to prepare a valuation, the reports can often produce wildly differing figures which can then mean that a dispute ensues regarding the true value of the shares, and ultimately what relief is just and equitable in the circumstances.
It is important for any parties to shareholder disputes to consider that the court has an absolute discretion to make any order it thinks fit for granting relief, including what value it attaches to the shares.
This however can lead to uncertainty for parties to such litigation, as whilst a favourable expert report can, to some extent, offer a degree of comfort in support of their position, the court will always do will always prioritise workable, commercial outcomes over rigid adherence to accounting valuations.
Avoiding the nightmare
Whilst it is not always possible to avoid the nightmare and uncertainty of litigation, there are steps that can be taken to ensure that the risk is kept to a minimum.
The best protection remains a well-drafted shareholders’ agreement containing clear buy-out provisions, a specified valuation methodology (or appointed expert accountant), and a defined valuation date. Drag-along and tag-along rights, can also help to prevent a case reaching court.
If faced with litigation, an early pragmatic approach to obtaining expert valuations can assist in avoiding a drawn-out court case. The courts are keen for parties to engage with one another to obtain early valuations to try and reach timely settlements to avoid unnecessary costs and time expenditure.
Contact us today on 0161 696 6170 to speak to our specialist solicitors.
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