One of the most important practical issues in an unfair prejudice petition is the valuation of shares. In many cases the court concludes that the most appropriate remedy is a buy-out order requiring one shareholder to purchase the shares of another.
When this happens, the court must determine the price that should be paid for those shares. The process can be complex because private company shares are not publicly traded and their value often depends on the financial performance of the business, the structure of the company and the conduct that led to the dispute.
For this reason, share valuation is frequently one of the most contested aspects of unfair prejudice litigation.
Why does share valuation matter in unfair prejudice petitions?
In many shareholder disputes the underlying objective is not simply to establish that unfair conduct occurred. The real commercial goal is often to enable one shareholder to have their shares valued and exit the company at a fair price.
A buy-out order provides a mechanism for achieving this outcome. However, determining the value of the shares can be challenging, particularly in privately owned businesses where there is no active market for the shares.
The valuation process therefore plays a central role in resolving many unfair prejudice petitions.
What does the court mean by “fair value” in section 994 cases?
When ordering a share purchase under section 996 of the Companies Act 2006, the court seeks to determine a fair value for the shares.
Fair value does not necessarily mean market value. Instead, the court considers what value would fairly compensate the shareholder for their interest in the company, taking into account the circumstances of the dispute.
This assessment may involve analysing several factors including:
- the company’s financial performance
- the assets and liabilities of the business
- the company’s future prospects
- the shareholding structure.
The court’s aim is to ensure that the shareholder being bought out receives a price that reflects the true value of their investment.
Do minority discounts apply in unfair prejudice buy-outs?
A key issue in many valuation disputes is whether a minority discount should be applied.
- In commercial markets, shares representing a minority interest in a company may be worth less than shares carrying control. This is because minority shareholders often have limited influence over decision-making.
- However, courts frequently decline to apply a minority discount in unfair prejudice cases. This is particularly common where the company operates as a quasi-partnership or where the unfair conduct itself caused the shareholder to become a minority.
The reasoning is that it would be unjust to reduce the value of the petitioner’s shares where the minority position arose from unfair conduct.
Each case depends on its specific facts, but the courts generally aim to ensure that the valuation outcome is equitable.
What valuation date does the court usually use?
Another important issue is the date at which the shares should be valued.
Different valuation dates can produce significantly different outcomes, particularly where the company’s financial performance has changed during the dispute.
Courts may consider several possible dates, including:
- the date the unfair conduct occurred
- the date the petition was issued
- the date of the court’s order.
The appropriate valuation date will depend on what the court considers fair in the circumstances. In some cases the court may select a date that prevents the wrongdoer from benefiting from the unfair conduct.
What role do valuation experts play in unfair prejudice disputes?
Because valuation is often technically complex, expert evidence is commonly required.
Independent valuation experts may be appointed to assess the company’s financial position and provide an opinion on the fair value of the shares.
Experts typically review a wide range of financial information including:
- company accounts and management accounts
- financial projections
- asset valuations
- market comparisons where available.
Their analysis may involve established valuation methods such as earnings multiples, asset-based approaches or discounted cash flow models.
In many cases the expert evidence becomes the focal point of the litigation, particularly where the parties disagree on the value of the company.
Why valuation disputes often lead to settlement
Valuation evidence can significantly influence the outcome of unfair prejudice litigation. Once expert reports are exchanged, both parties often gain a clearer understanding of the likely financial outcome.
This can encourage negotiation and settlement, particularly where a buy-out order appears inevitable.
For this reason, many unfair prejudice petitions resolve shortly after valuation evidence is produced.
Key takeaway
Share valuation is frequently the most commercially significant aspect of an unfair prejudice claim. The court’s goal is to ensure that the shareholder being bought out receives a fair price for their shares.
Because valuation can be complex and fact-specific, expert evidence and careful financial analysis are usually essential.
Francis Wilks & Jones were responsive, available at all times to deal with any of my queries and very reassuring. I would definitely recommend them to deal with proceedings brought on behalf of shareholders – they understood our practical needs.
A shareholder we helped bring unfair prejudice proceedings against a fellow shareholder who had been interfering with the management of the company and damaging its value
