Valuing the Shares of a Departing Shareholder

Recent case law illustrates the importance of setting out in a company’s articles of association how shares will be valued in the event that a shareholder leaves that company.

Articles of association for private limited companies often state that when a shareholder departs the company, he must offer his shares for sale to the remaining shareholders. In this way the remaining shareholders who are actively involved in running the company can retain control and the risks associated with dealing with a new shareholder (if the shares are offered elsewhere) are reduced.

However, problems can arise as to how the shares should be valued upon a shareholder’s departure as that shareholder may not agree with a valuation provided by appointed accountants or auditors. A disagreement arose in a recent case where one of the three shareholders left the company and challenged the accountants’ expert valuation which he considered to be too low.

The accountants had valued the shares on the basis that the remaining shareholders would no longer be involved in running the business, even though they continued to be shareholders. The company’s articles of association did not set out provisions on how the shares should be valued.

The court held that in the absence of adequate provisions in the company documents, the accountants’ valuation of the shares could not be challenged.

How to avoid disputes over the share valuation?

The simple solution is to ensure the procedure for valuing the shares upon a shareholder’s departure should be clearly set out in the company’s articles of association or alternatively, in a shareholders’ agreement. In absence of such provisions the expert valuation of the accountants or auditors will apply.

For more information contact Tim Roberts or Troy Warner or telephone 01908 692769.