What is ‘fair value’ anyway?

What is ‘fair value’ anyway?

A recent High Court case has shed some light on the ‘fair value’ of shares held by a minority shareholder, which some would say may not have been that fair.

It is common practice for companies with more than one shareholder (particularly those with employee or minority shareholders) to include provisions requiring those shareholders to transfer their shares back to the company or to other (usually, majority) shareholders on the occurrence of certain events. Whenever a transfer takes place, the price of the shares being transferred should be considered and the articles of association (and shareholders’ agreement, if there is one) will usually determine whether that price is: nil, par value, fair value or something else. Nil or par value are easy to determine but the company’s articles of association will usually include specific wording as to when fair value is applied and how it is calculated. This is where things can get tricky.

In Re Euro Accessories Ltd Monaghan v Gilsenan and another [2021] EWHC 47 (Ch), fair value was discussed and, in particular, whether a minority shareholder was entitled to have his shares valued at an amount calculated pro rata to the value of the entire issued share capital of the company or whether the value should be diminished due to the ‘minority’ nature of his shareholding.

In 2003, the petitioner had joined the company as a sales representative. In February 2008, another shareholder voluntarily transferred 24.99% of the then issued share capital of the company to the petitioner. Some time around January 2010, the relationship between the parties broke down and, on 31 January, the petitioner resigned from the company, triggering a compulsory transfer of his shares in accordance with the company’s articles of association.

The minority shareholder argued that the meaning of the expression ‘fair value’ was akin to the definition found in the 2013 edition of the International Valuation Standards: “the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties”. The majority shareholder, however, contended that ‘fair value’ meant the value of the shares on a sale between a willing buyer and a willing seller and that, as the shares represented a minority holding, the price should be discounted to reflect that fact.

The High Court rejected the minority shareholder’s argument that ‘fair value’ (within the context of the company’s articles of association) meant that he was entitled to be paid an amount for his 24.99% minority shareholding which was calculated pro rata to the value of the entire issued share capital of the company. Instead, the Court held that it was a clear statement of general principle that, unless there were indications to the contrary (for example, in the company’s articles of association or shareholders’ agreement) then the general principle was that a ‘fair value’ had to be given to what was actually being compulsorily transferred (in this case, a minority shareholding with less control over the company than a majority or equal shareholding, inherently making those shares less valuable).

If you would like us to review your company’s articles of association or to review or put in place a shareholders’ agreement with considered fair value provisions, contact us on 01782 262031.