Introduction
I have previously written articles on the valuation of shares and shareholding disputes. In this article I give some hints on possible approaches to consider when attempting to resolve disputes over the valuation of businesses or shares.
Differences, disagreements or disputes over valuation of businesses or shares are common. These normally arise when one party has to sell its existing shares, and another existing shareholder wishes to buy the shares being sold, through for example, the exercise of pre-emptive rights. Such rights may be contained in a shareholders’ agreement, other investment agreement or in the company’s Articles of Association. Even in negotiations conducted in mergers and acquisitions parties may have different valuations. They may narrow their differences during negotiations. If they do not find common ground one of the parties may walk away from the negotiations.
When an expert is appointed to carry out independent valuation of shares
In this scenario parties may limit themselves to agreeing on the expert to carry out the valuation. Such an expert may be an experienced chartered accountant, another finance professional or a banker. At times an arbitration agreement or clause may state who will appoint the expert in the event of parties not agreeing. For example, such an expert may be appointed by a Court, Commercial Arbitration Centre, Law Society of Zimbabwe or the Institute of Chartered Accountants or as they parties would have agreed. Once the expert is appointed, he or she will then ask the parties to submit the information required for the valuation. Such information may include the following:
- Overview of the business of the entity being valued.
- Strategic plans.
- Annual budgets.
- Financial statements or management accounts for the last 3-5 years clearly showing profitability, cashflows and the Statement of Financial Position (Balance Sheet).
- Reports on the valuation of physical assets such as property, plant and equipment.
- Borrowing interest rates.
Upon obtaining the above information the expert will carry out an independent valuation of the business or shares.
When parties submit their own valuations for arbitrator to make a determination
It may be agreed that as part of the arbitral proceedings each party will submit its own valuation of the business or shares to the arbitrator. Each party will ask the arbitrator to consider its valuation favourably. In such circumstances it is common for a party to engage its own expert or advisor such as its accountant or business advisor to come up with a valuation report. The business or valuation report may include the following information:
- Valuation methods used, for example Net Assets Method, Discounted Cashflow Method or Net Present Value.
- In the case of Net Assets Method, disclosure whether an independent valuation of property, plant and equipment was done by professional valuers in the real estate industry.
- The operating assumptions such as market outlook, inflation, exchange rates, market share, volumes, prices, costs, interest rates, taxes, etc.
- Capital expenditure required to maintain or expand capacity.
- Valuation period, whether 3-5 years, shorter or longer.
Parties in their respective responses will have the opportunity to point out weaknesses in the valuation reports submitted by the other party.
If it is agreed that the parties will appear before the arbitrator to make oral submissions a party may choose to bring its expert as a witness. The witness may make submissions to the arbitrator including explaining the valuation methodology and results. The arbitrator may put across questions to the expert for clarity of certain things.
The other party may also bring its expert to explain its valuation methodology and results. Parties may explain areas they agree or disagree on and ask the arbitrator to them make a determination. Depending on the circumstances, preference, experience or judgement of the arbitrator he or she may take into account the expert submissions made to come up with his own valuation of the business or shares.
Problem of information during valuation of businesses or shares
It is a common problem during valuation of shares for dispute resolution that a party with the information required may not fully cooperate. This may happen if the party wishes to delay the process or constrain the reasonableness of the valuation. Some parties may ask the expert or arbitrator the information required. The parties may then agree on the available information and when to make it available to the expert or arbitrator.
Conclusion
The approach to be taken in the valuation of businesses or shares may depend with the circumstances, preference of the parties, the expert or arbitrator and the availability of information or other considerations.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice. It does not target any known individuals or entities.
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 ghofisi@hofisilaw.com or gohofisi@gmail.com
