Is “fair value” always fair?
Fair value provisions in Articles of Association
A company’s Articles of Association often require shares to be valued “at fair value” variously by its auditor, an expert or someone recommended by the President of the Institute of Chartered Accountants in England & Wales. A Court may also direct that shares be so valued. The circumstances which require for a fair valuation of shares are varied but triggers may include:
• Shareholder disputes
• Employee shareholders leaving employment
There is, however, no legal definition of “fair” in this context and it is very much in the gift of the appointed valuer to interpret its meaning taking into account the circumstances of the related share valuation. This is an area where aggrieved parties often commission a second valuation to challenge the first unless the Articles of Association state or the Court rules, as it often does, that the expert’s valuation is to be binding on all parties, a condition which generally can only be overturned if manifest error on the part of the valuer can be proved.
We have already discussed the broad principles upon which share valuation is based (see earlier Newsdesk items How much is my company worth and Fair shares for all or in the minority?). In situations where a fair value is required, an additional consideration comes into play – is the valuation fair vis-à-vis the actual circumstances of the shareholders involved. The experience of the valuer in such a situation is paramount.
Value is often fair only in the eyes of the beholder!