Recent lessons in determining fair value – Share valuation can be a contentious issue, especially if the valuation is left to the courts

02 May 2023

In negotiating the relationship between shareholders, it has always been important to consider a methodology to determine the value of shares. This issue has been the subject of two recent High Court judgments in the context of dissenting shareholders selling their shares at fair value pursuant to section 164 of the Companies Act, 71 of 2008 (“Act”).

The relevant section of the Act refers to shares being sold at fair value. There is, however, no definition of fair value in the Act and there is no legislative guidance as to the meaning, application, or content of the term. This point was stressed in the judgments, where it was further confirmed that there are various methodologies to determine fair value and no one method is considered superior to any other. In fact, the same methodology could result in different valuations due to the available data or the assumptions used in the determination.

These findings would be applicable to all disputes between shareholders as to value. If parties cannot agree a fair value or a methodology to determine a fair value, there will be little option but to seek a judicial determination to settle the issue. Based on the recent decisions, this may lead to unforeseen outcomes as to value, especially given that there is an array of valuation models such as Net Asset Value, earnings discounted cashflows and multiples, which the court could consider appropriate.

In an attempt to remove uncertainty regarding the determination of fair value, we always recommend that agreed valuation provisions be included in a shareholders’ agreement, memorandum of incorporation or other constitutional documents. As a minimum, such provisions should always include:

• the third-party expert responsible for providing the valuation and how such party be selected;
• the agreed formula or approach to be taken in determining the value;
• the circumstances in which a valuation will be required; and
• the period in which the value must be determined.

Ideally these provisions should be included when agreements are initially signed but can be agreed at a later stage. This is particularly important where the current agreements only refer to a vague definition of ‘fair value’ or ‘market value’ without any real substance (which will be just as problematic as not inserting any definition at all). This may also result in costly and lengthy litigation or arbitration to settle the issue, should it arise.

Moreover, if there is a dispute between the parties, which has given rise to the issue of determining fair value of the company’s shares, it is unlikely that the parties will agree a value at that stage. It will clearly benefit all stakeholders in a company to avoid the issue of fair value being determined by a court or arbitration, who may have to grapple with whether to apply Net Asset Value, earnings, discounted cashflows, multiples or even another form valuation to the determine the value of a company’s shares.

For any assistance on drafting or reviewing your agreements already in place, please contact the Eversheds Sutherland Commercial team.

See also:

• The difference between a sale of shares and a sale of business
• Am I a shareholder? How do I know?
• Drafting Memorandum of Incorporation (MOI) share structures – Important considerations
• Could shareholders inadvertently cancel their Shareholders Agreement?

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)