September 28, 2022

Shareholder Disputes and Business Valuation

Business Valuation

A minority shareholder who believes he has been treated unfairly or opposes the controlling owner’s decisions is frequently involved in business valuation disputes. These disagreements can sometimes be difficult to resolve peacefully, leading to costly and prolonged litigation. This can prove to be a huge source of interruption for firm leadership and, as a result, hurt a company’s value. Frequently, these business valuation disputes result in the departure of a business partner or minority shareholder.

Differing shareholder actions or minority oppression actions are the two most common shareholder dispute claims. Mentioned below are some common events that lead to business valuation disputes:

  • False advertising
  • Forceful dissolution of a business (diversion of income)
  • Non-receipt of dividends
  • Contractual Breach

Business valuation experts frequently play a key role in sorting business valuation disputes by offering impartial and objective value viewpoints for the shares under consideration. Business appraisers typically use the same process and methodology for shareholder disputes for other types of engagements. However, a few aspects of business pricing are specific to shareholder disputes that attorneys and experts should be aware of.

Prevent issues with the Buy-Sell Agreement

Most businesses valuation disputeswould have been settled before the court if the owners had drafted a buy-sell agreement. Valuation experts can assist owners along with their attorneys in drafting provisions in purchase agreements that can prove to be beneficial in settling disputes and reducing the likelihood of time-consuming and costly court battles. In situations where a shareholder is permitted or obliged to purchase another shareholder’s share it can be found within the buy-sell agreements’ provision. Even the information on how the value of those shares can be determined is provided in it. Establishing mechanisms to decide share value is especially important, as pricing disputes can drag on for long periods of time.

A pricing formula, an agreed-upon value, or a set of guiding principles for hiring an independent valuation professional are examples of these mechanisms. If the third-party/independent appraisal is required, then the agreement should also include business valuation components such as the standard and premise of value, the valuation date, and the use of valuation price reductions. When applied inconsistently, all of these components can substantially affect the resulting value conclusion. By clearly defining them, the likelihood of business valuation disputes can be reduced. In case the dispute goes to court, the court could uphold the conditions associated with a buy-sell agreement. Due to the complex statutes and case law, shareholder disputes can be drawn out if the parties have no buy-sell agreement with specified valuation components , as discussed in the sections below.

In shareholder disputes, there is a degree of value

Before beginning any appraisal, valuation experts should determine and describe the adequate degree of value. A series of hypothetical situations under which the business will be valued is a degree/standard of value.

Investment value and fair market value are commonly accepted value standards. It’s critical to pick the right value benchmark and apply it correctly because every single standard can produce different value opinions. This can be difficult in a courtroom because the correct standard varies based on the case’s nature and the jurisdiction.

As a result, attorneys must communicate with the valuation professionals to comprehend the standard of value in business valuation disputes in specific states. All the states have their own set of shareholder rights laws, also known as dissenting shareholder statutes or minority oppression statutes, that protect minority shareholders.

Fair Market Value vs Fair Value: What’s the Difference?

The main distinction you will find between the two standards is that appraisers can use valuation discounts like the discount for lack of marketability (DLOM) or discount for lack of control (DOC) to determine the value of minority interests under fair market value. In contrast, the fair value does not always require valuation discounts. Discounts’ applicability varies from one state to another, just like the standard of value.

Issues with Valuation Dates and Timing

It’s vital to remember that business valuation is a value estimate at a specific time. According to many dissenting shareholder statutes, companies should ascertain fair value as of the day of the shareholder meeting where the business proposal was dissented from.

Likewise, various statutes related to minorities oppression states that the fair value must be determined as the oppressive action’s commencement date. Another issue in business valuation disputes is whether any data elements unknown at the dissenting or oppressive action need to be considered in fair value calculations.

Conclusion:

Everyone must communicate rules. Aside from standard of value, discounts, and timing factors, there are other valuation nuances to consider in business valuation disputes. Before beginning any valuation project, it’s important to think about the laws that govern these issues. While some experienced pricing experts may be aware of the rules in certain jurisdictions, many will depend on the attorney’s advice.

As a result, attorneys must assess and clearly define their valuation expert’s apprehension of these problems. This is because it has the ability to substantially affect the value as well as the court’s decision.

Consider working with Strothman+Co for better assistance on business valuation disputes.

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