Continuing the series of examples of important provisions in a Shareholder Agreement. 

6. Valuation of shareholding

Many disputes between shareholders arise over the issue of how to value shares, in situations where a transfer or disposal is to happen. It is therefore important to have an agreed mechanism for the valuation of shares, which can be brought into play whenever required. Having the matter thoroughly thought through, discussed and included in a Shareholder Agreement can avoid future disputes and really assist in the smooth running of the company.

The valuation method should be discussed with the company’s accountant. It will be likely to differ according the line of business or market sector of each company. For example a standard valuation method (such as a price earnings ratio) may be used, to be applied to the company’s profits in the year immediately preceding the proposed transfer (or alternatively to be applied to the average of the last three year’s profits immediately prior to the proposed transfer). There will then be questions such as whether the shares should be discounted if a minority holding is being disposed of, whether there are any specific accounting principles to be applied, should the company be valued on an asset basis (i.e. it’s current assets less it’s current liabilities) or on an earnings basis (usually a multiple on profits) and should the future potential of the company be taken into account.

7. Guarantees

It is quite common, particularly for new companies, for lenders or creditors to require personal guarantees from some or all of the shareholders. It may be that the shareholders wish to spread the liability under such guarantees amongst all the shareholders, most usually according to the proportions of their shareholding. This can be included in the binding shareholder Agreement.

Nothing in this awareness article is intended as legal advice. If you have a specific legal requirement or query you should consult a solicitor directly.