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Review share valuation provisions in company articles of association - 04/09/2008
Shareholders in a private limited company were required to offer their shares back to the other shareholders if they left. The articles of association provided for expert accountants to value the shareholding. There was no guidance on the articles stating how they should value the shares. Following a dispute, one of the three shareholders left, and offered his shares to the others, as required. Each was a key individual in the business.
The expert accountants valued the company on a basis that produced a lower valuation than the departing shareholder had expected. The accountants had produced a memorandum stating how they had arrived at their valuation (although they were not required to do so). The company had been valued on the basis that the remaining two shareholders would cease to be involved in the business even though they were, in fact, staying. The departing shareholder challenged the valuation.
The court said that, in the absence of any guidance on how to value the shares in the articles of association, it was not open to the departing shareholder to challenge the expert decision of the accountants.
Recommendation
Shareholders must either ensure their company's articles of association set out the basis upon which shares should be valued in these circumstances, or accept the expert valuation.
