13 May 2016

How shares should be valued on disposal

Companies and shareholders should check any pre-emption provisions in their articles to ensure they understand how the shares will be valued if the provisions are to be exercised, following a recent ruling.

Many UK companies' articles of association contain 'pre-emption' clauses requiring a shareholder who wants to dispose of their shares to offer them pro-rata to other shareholders before they can be transferred to anyone else, or in any other proportions. In those circumstances it is essential the pre-emption clauses make clear how the price to be paid by the other shareholders will be calculated.  For instance, it must be made clear whether the value of shares comprising a minority holding should be discounted on such a valuation, to take account of the fact they are not a controlling stake.

In this case, two minority shareholders wanted to sell 22 per cent of a company's shares. Pre-emption rights applied under the articles of association. In relation to valuation of the shares, these said:

"The "prescribed price" shall be such sum per share as shall be agreed between the Vendor and the Company failing which it shall be the median price of the prices as determined and certified in writing by two independent chartered accountants as being in their opinion the fair value thereof as between a willing buyer and a willing seller valuing the Company on a going concern basis … the said chartered accountant when determining and certifying the fair value of the Transfer Shares as aforesaid shall act as an expert and not as arbitrator."

The sellers argued that the words 'sum per share' meant their shares should be valued on a per share basis, rather than as a bloc of shares. No discount should therefore be applied on the valuation of their shares on the basis that the shares, as a block, comprised only a minority stake.

The buyer argued that the references to the 'fair value of the Transfer Shares', and to valuing them on the basis of a sale between a willing buyer and a willing seller, both implied the shares to be transferred should be valued as a block, so that it would be appropriate to discount them for being a minority stake.

The court agreed with the sellers. It said that the words 'sum per share' clearly meant shares should be valued simply by dividing the value of the company by the number of shares in issue, and no discount should therefore be applied. The court said that these words:

  • trumped the later wording 'the fair value of the Transfer Shares' – the word 'thereof' showed that a 'value per share' was intended, rather than valuation as a block;
  • overrode the requirement that the shares be valued on the basis the sale was between a willing buyer and a willing seller, which could also carry the implication that they should be valued as a block.

Recommendation

Companies and shareholders should check any pre-emption provisions in their articles and ensure they understand exactly how shares will be valued if a proposed transfer triggers the operation of those provisions.

Case ref:

Cosmetic Warriors Ltd & Anor v Gerrie & Anor [2015] EWHC 3718

If you'd like to discuss any of the above, please contact Andrew Bradley on 0113 297 7737 or at abradley@shulmans.co.uk.