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How to Value Company Shares – Court of Appeal Guidance

Valuing shares is notoriously difficult and is generally a matter of taking a reasonable view of what a hypothetical buyer might pay. That was the approach taken by the Court of Appeal in putting a price on a minority shareholding in a holiday park.

Following a falling out between the four equal shareholders in the company that owned the park, one of them (the minority shareholder) launched a petition under Section 994 of the Companies Act 2006 on the basis that he had been excluded from management of the company and unfairly prejudiced in the conduct of its affairs. The petition was upheld by a judge who ordered the other three shareholders to buy out his interest in the company.

An independent expert was appointed to value that interest and found on the basis of a property consultant’s advice that the company was worth £2.85 million and that the minority shareholder was thus due £712,500. The majority shareholders’ challenge to that valuation was subsequently rejected by a judge.

In challenging the latter decision, the majority shareholders argued that the expert had wrongly focused on the value of the park as a physical asset, rather than that of the business. No account had been taken of the company’s £1.4 million debts. The minority shareholder, however, submitted that those debts did not threaten the company’s income stream and were only a snapshot of its bank borrowings on the valuation date.

In upholding the majority shareholders’ appeal, the Court found that the company stood to be valued on the basis of the sum a reasonable buyer with knowledge of all material facts could be expected to pay for 100 per cent of its shares. There was no basis on which the company’s debts could be ignored and the Court directed that half of those borrowings, £700,000, should be deducted from the valuation. The sum payable to the minority shareholder was thus reduced to £537,500.