In the present market, it is likely that there will be many instances of shareholders in unquoted companies, which are often owned and managed by a small group of people, selling their shares to other shareholders. The main problem in such instances is almost always the question of the valuation of the shares.

Sometimes, a company’s Articles of Association will contain a mechanism outlining the steps to take in such circumstances. Alternatively, and more commonly, a shareholders’ agreement will have been entered into. In either case, unless a valuation formula has been set out, the shares which are changing hands will have to be independently valued and this is where the problems usually start.

In a recent case heard by the Court of Appeal, a minority shareholder who had been a director of a company was required, by the Articles of Association of the company, to sell his shares as a result of leaving the company. Independent valuers, a large firm of accountants, were appointed by the company. When they delivered their valuation of the ex-director’s shares, he disagreed with it.

The circumstances were that the company had appointed the accountants and signed the letter of engagement. The ex-director maintained the stance that he was reserving his position and refused to sign the letter of engagement.

The argument turned on whether the accountants were validly appointed to value the shares. In the view of the Court, they had not been validly appointed under a tripartite agreement and the ex-director was therefore not bound by their valuation.

Lord Justice Mummery commented that the issue ‘…would not have arisen if the Articles had contained the provision commonly included in the Articles of Association, in the context of invoking the compulsory transfer provisions, that the value of the shares is to be determined by the auditors of the company. The auditors of the company are already in office. The issue of a disputed appointment would not arise’.

As this case illustrates, buyouts of minority shareholders are often subject to dispute, even in those instances where relations between the shareholders are relatively cordial. It is sensible to think about such things early on in the life of a small company as once it becomes successful, delay normally makes things more difficult.