Valuing shareholdings

The Date of Valuation

Often, the date upon which a company or a shareholding in a company is to be valued can have a significant affect on the outcome of the valuation.

Where the buyer and seller have agreed the date of the valuation, there is normally no difficulty.

Similarly, where a sale occurs as a result of provisions set out in a company's Articles of Association, there is normally no argument on this issue.

However, where a valuation arises as a consequence of a dispute between shareholders (for example, because the court has ordered one party to purchase the shareholding of the other party), the question of the date upon which the valuation should be carried out becomes an important consideration.

From the valuer's perspective, the easiest date to work from is normally the company's year end, when there may well be accounts which have already been professionally drawn up.

Obviously, these provide a useful reference point for any valuation, but it may well be that the date of the company's financial year end, as a date at which to value the Company, is far more advantageous to one shareholder than it is to another.

Take, for example, the position where two people are in business together as equal 50% shareholders in a Limited Company.

The Company is successful and as at the financial year end of 31st December, the latest available Company accounts show a very healthy position.

However, midway through the current year, one of the shareholders leaves and sets up his own competing business in exactly the same field, seeking to deal with the same customers and the same business.

The net effect of this is to divide the customer base, drive down profitability and generally devalue the Company.

However, a valuation of the Company carried out at the date of the last available year end accounts would not reflect the true position and would substantially overvalue the Company and any shareholding in the Company.

Generally speaking, the court's attitude to this position is that the appropriate valuation date is a date which is as close as possible to the actual date of sale, so as to best reflect the value of what the shareholder is selling.

Accordingly, the normal valuation date chosen by the court where there has been an order for shares to be bought out at an independent valuation, will be the date of the court order itself.

However, the court will remain mindful of any unfairness that may result from applying this general principle.