Share alike

Obtaining share valuation in s 459 Companies Act minority oppression cases, the breakdown of quasi-partnerships and contentious probate matters is not a recent requirement, but the number of instructions to experts has risen dramatically since White v White [2000] UKHL 54. Matrimonial breakdown is now probably responsible for most instructions and that is likely to increase after the Lords' decision in Miller [2006] UKHL 24.

If the matrimonial settlement could depend upon the increase in wealth during the marriage, you may wish to obtain a share valuation as at the start of the marriage, or possibly even during prior cohabitation. But share valuation can be expensive and the quality of results can vary widely. Judges are unlikely to let you incur the costs of a second expert if you are unhappy with your original report '“ so getting it right first time is vital to success.

What to instruct?

The right results will come from a broad understanding of the valuation process. The first thing a valuer needs to understand is the purpose and basis of the valuation, because different rules and principles may apply. For example, in a probate matter, the inheritance tax on a chargeable transfer to a discretionary trust or on a potentially exempt transfer the valuation is of the reduction in value of the transferor's estate, which may not be the same as the valuation of the parcel of shares transferred. There are three main bases of valuation:

Open market value '“ This is the normal basis of valuation that applies in most taxation matters, and is commonly used in divorce. The open market value is the price the shares would fetch if offered to all potential purchasers, including those who might have a special interest. The valuation is made on the hypothetical basis of a willing buyer and a willing seller. The valuation of an individual shareholding may or may not be discounted.

Valuation in accordance with special rules '“ The Memorandum and Articles of Association or a shareholders' agreement can contain special rules on share disposal. This can significantly affect their value, for example, by restricting the pool of potential purchasers.

Fair value '“ A transaction at fair value is commonly prescribed in the Articles of Association. While there is no statutory definition, a fair value is one that could be considered to be fair to all parties. It is commonly used in situations where an open market value of a minority shareholding would involve an excessive discount.

Although an experienced valuer will normally be aware of the different bases, you should make it clear in your instructions what basis is required. You will normally be requesting an open market valuation between a willing buyer and a willing seller.

In many cases, the seller is actually unwilling: consider whether to instruct the valuer to assume that the owner would do whatever a normal willing seller would do. If you don't know, instruct the valuer to explain which basis they consider to be the appropriate one.

Minority shareholdings

The method of valuing minority shareholdings can vary. Valuing the whole company may not be necessary. Instead, ask the valuer to explain in his report whether he believes that a valuation of the whole company is needed, and only to carry out that valuation if necessary. In divorces, it is very important to ask the valuer to comment on whether the business might be considered to be a quasi-partnership. This is because the valuation of a minority shareholding should be an undiscounted value pro rata to the value of the company as a whole. If the company is not a quasi-partnership, it might not be necessary to value the business as a whole, as sometimes the value will just be based on the level of dividends the shareholder can get.

Think ahead

Finally, consider what other information you may require at the same time as the value of the shares. It will usually be more efficient to instruct the valuer to answer these other questions at the outset. For example, in an ancillary relief matter you will usually need to know the theoretical capital gains tax position on an outright sale, or possibly a transfer from one party to the other. You may also require an opinion on the methods by which money could be raised or extracted from the business.

Who to instruct

Of equal importance to a good result is the choice of expert. Check who is doing the work: the proposed expert or another team member? Even though the junior member of staff might be very capable, and certainly the resulting opinion will be that of the named expert, the more work done by the expert, the better their grasp of the detail.

A 'big name' firm is not necessarily better, and an experienced local expert may well deliver better value for money.

What experience does the expert have of selling businesses in the industry concerned? Check first that the expert is someone who actually advises clients on buying or selling businesses. Find out what size of companies they deal with, and in what industries. An accountant will generally be able to deal with all the related issues, such as minority shares, capital gains tax and liquidity.

Professional qualifications are a must, but the highest guarantee of quality comes from qualification as an expert and/or membership of an expert's professional body.

Has the expert appeared in court and how did they do? The experience of being cross-examined can be very daunting. An experienced expert should be able to provide a reference from another instructing solicitor.

What will it cost?

It is very difficult to predict the possible complexity of the work and provide a quote without a full specification. Try to provide at least a detailed set of accounts, and the Memorandum and Articles of Association.

Check that the quote includes a visit to the business. Documentary evidence alone will rarely provide sufficient detail about the business to enable the expert to form a view.

Anne-Marie Naylor is a member of the UK200 Group Forensic Accounting Panel and the Academy of Experts. She is a chartered accountant and a Cardiff University Accredited Expert Witness. Tel: 01625 669669

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