The complications of business valuation in an unfair prejudice claim
Our specialist commercial litigation team handles shareholder disputes throughout the country. These disputes often lead to a claim of unfair prejudice, where one shareholder is treated unfairly (unlawfully). Accurately valuing the business is crucial when shareholders are in conflict, especially over claims of unfair bias. In these situations, valuation is not a simple numerical exercise, but rather a complex intersection between legal, financial, and strategic decision making.
Different stakeholder interests and different methodologies can complicate the valuation process. Understanding these complexities are crucial for any shareholder contemplating or involved in legal action.
We have examined some of the most common complexities that arise when valuing a business for the purpose of a claim of unfair prejudice. 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 values are used to determine a fair value for shares regardless of market conditions in claims and disputes. Fair value reflects true, intrinsic value in a fair manner 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 situations where shares are publicly listed, market value can be more transparent due to observable 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 an important source document, along with other core documents such as articles or loan agreements. These contracts often predefine valuation methodologies, detail specific circumstances that require a share valuation, and outline shareholders’ rights and obligations. 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 may also specify if minority discounts and control premiums are applicable, which can have a significant impact on share valuation during transactions.
In situations where unfair prejudice is a violation of the Companies Act 2006, s.994-996, how these agreements have been interpreted can have a significant impact on financial outcomes for minor 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. It is only logical that if a rogue competitor has taken steps that undermine (or impact) value, that conduct should be ignored. The timing of a valuation becomes crucial in unfair prejudice claims. The “effective date” of valuation, whether it is when the alleged unfair action occurred or at another time, will determine the financial metrics and, in many cases, 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. Often, historical and projected figures can be combined to arrive at an overall valuation. The timing of the valuation can have a significant impact on the outcome.
For instance, valuing the company after a downturn in the market or before a significant recovery can alter its perceived value and affect shareholders differently depending on the stake they hold and the nature of their 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. Financial projections can be complex in industries that are subject to rapid technological advances or regulatory changes. 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 can be difficult to quantify, even though they may make up a large portion of the value of a business.
Minority discounts and Control premiums
The use of minority discounts and controls premiums in business valuations can be a contentious issue, especially when there are unfair prejudice claims. These adjustments reflect actual power dynamics within an organization.
A minorities discount reflects reduced marketability and control, 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 is to fairly quantify the impact on the value of minority shares without unfairly punishing minority shareholders or enriching major 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 tools that we can use to protect or improve our position. 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. Our specialist commercial litigation team will be happy to help you if you’re in a dispute with a business partner, owner or other shareholder. At Helix Law we have a team with considerable strength in depth and experience in litigating unfair prejudice claims successfully.
