Introduction
I have written many articles on the valuation of companies and shares in the past. In this article I look at commercial disputes involving or requiring the valuation of shares and how such disputes can be resolved for example through arbitration or use of an expert valuer.
Valuation of shares versus valuation of physical assets
At times there is confusion as to whether valuers of physical assets such as professional valuers in the real estate business perform valuation of companies or shares. Alternatively, if an expert such as a chartered accountant is known for valuation of companies or shares there can be inquiries as to whether he or she can value physical assets. The two groups of valuers are acknowledged but what they value is different. Interestingly, valuers of companies or shares may use valuation reports compiled by professional real estate or property valuers when using the Net Asset Method to value a company or shares.
Nature of disputes
Disputes normally arise when at least one party wants or has to exit or disinvest from a company. This may be occasioned by different situations such as disagreements by the shareholders, a contractual requirement for one party to buy the other out, one party considering cashing –in on its shares. In some situations shares owned individually may become part of a deceased estate upon the death of a shareholder or the surviving shareholders may have the right to purchase the shares from the deceased estate. In some situations, for example those involving venture capitalists, an investor may acquire shares with the intention of selling them back to the company through redemption or to sell to some of the existing shareholders such as the founder after some or agreed timeframe.
Arbitration versus use of a company or shares valuation expert
The following situations are common:
- An arbitrator being asked to make a determination on a fair valuation of shares based on the submissions made by the parties to the dispute.
- An expert business or share valuer, such as an experienced chartered accountant with commercial experience, being asked to independently value the shares.
These two situations are explained below.
Arbitration on the valuation of shares
Parties may agree, for example, through a shareholders’, joint venture or other investment agreements, that in the event of a dispute such shall be resolved through arbitration. I have seen many agreements which make reference to the involvement of the Commercial Arbitration Centre in Harare.
In this situation each of the parties makes submissions based on what they consider to be a fair or reasonable valuation of the company or shares. They may even ask their own expert to carry out a valuation for them and then use such valuation results to argue their case. Some may even use the valuer of shares as an expert witness to bolster their case.
Having considered submissions by the parties, written only or including oral as well, the arbitrator then makes a determination. What is important is for the arbitrator to have a very good understanding of both the law and business particularly valuation of companies or shares.
Valuation of shares by an expert
I have also seen some commercial agreements which provide for the valuation of shares by an expert such as an experienced chartered accountant in certain situations such as upon exit or where there is a dispute. In such situations the parties themselves may agree on the chartered accountant to appoint or may ask professional bodies such as the Institute of Chartered Accountants of Zimbabwe or the Law Society of Zimbabwe to assist in the appointment.
The mandate of the expert will be to independently value the shares in a manner he or she considers most appropriate in the circumstances. Some of the methods used may include the Discounted Cashflow Method (“DCM”) also known as the Net Present Value (“NPV”) method, Net Assets Method, capitalisation of average annual earnings, price earnings method, etc.
The valuation expert may require the parties to provide certain information such as:
- Valuation results for physical assets such as land and buildings, plant and machinery, etc.
- Current assets.
- All liabilities.
- Actual earnings or cashflows for the last say 3-5 years in a stable currency.
- Future projections for both cashflows and the income statement, for say 3-5 years.
- Strategic plans and annual budgets.
- The commercial agreement between or by the parties.
The expert then carries out an independent valuation and places a value on the business or shares in the company.
Conclusion
Commercial disputes involving or requiring valuation of a company or company shares are quite common. They can be resolved through mutual engagement, mediation, arbitration or use of an expert such as a chartered accountant with experience in valuation or litigation in Courts.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Profile
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
