Valuations can be needed for a range of business purposes. Business owners might be contemplating a sale or seeking investment and needing to know what value their shares could raise. Management might be contemplating an MBO and both they and the vendor need to know where to pitch offers. Shareholders may be leaving and need buying out. After a company sale, there may be a dispute over the value of shares bought and sold.
The latter category is a typical scenario where after a company sale, one party considers what they had been sold isn’t what the vendor warranted it was. Where there is a breach of warranty, it is necessary to work out the value of the company as if the warranty was true and the value of the company as it was with the breach of warranty.
In one such matter one of our experts acted in, the situation was complicated by there being a share for share exchange. It was therefore necessary to provide the Court and the parties with valuations of both companies’ shares in the warranty true and warranty false situations.
This situation is unusual, although we have seen it more than once, because the vendor receiving shares in return for their company will probably receive a minority shareholding in the buyer. In the case we were acting in, the acquiring company had no history of paying dividends. It was therefore necessary to consider how the shares in the buyer could be valued with no dividend record and only being a minority.
As with any valuation, consideration needs to be given to the cash flows that the holder of the shares can expect to receive from holding in the shares. In the case acted in, it was determined that the most likely route for the new shareholder to receive value for the shares received was on a further sale or listing of the acquiring company.
The approach was therefore to value the shares on the basis of a sale of the company as warranted and as the company actually was. Our expert’s approach was to consider the different timing of the sale that would arise because of the matters giving rise to the breach of warranty. The difference in value was therefore calculated as effectively the difference in the valuation date net present value assuming a sale of shares soon after receipt and the valuation date net present value assuming a delayed and more uncertain sale.
Valuations can be needed for a range of business purposes.
The difference in value was therefore calculated as effectively the difference in the valuation date net present value assuming a sale of shares soon after receipt and the valuation date net present value assuming a delayed and more uncertain sale.
The other party’s expert initially disputed this approach but, as the trial started, provided a new report adopting that approach. The approach our expert put forward was accepted by the Court and a substantial award of damages made to our instructing solicitor’s client.