How are shares valued in a shareholder dispute?

The first question is what the valuation must resolve: a voluntary purchase between owners, a transfer under the articles or shareholders’ agreement, or a purchase connected with court proceedings. These are different instructions, even when they concern the same shares. Before calculating anything, the valuer needs to identify the interest being valued, the relevant documents, the valuation date and the meaning of value required for that particular exercise.

A contractual provision might prescribe a formula, require an independent expert or specify assumptions about the transaction. Its interpretation is a legal question. Wording such as ‘fair value’ should not be assumed to mean the same thing in every agreement, accounting standard or dispute. Where the wording is contested, solicitors should identify the agreed interpretation or provide alternative instructions so that the financial consequences can be assessed without the valuer deciding the legal issue.

For UK companies, section 994 of the Companies Act 2006 provides a route for a member to petition on grounds of unfairly prejudicial conduct of the company’s affairs. Section 996 gives the court broad powers to grant relief, including provision for a purchase of shares. Those provisions do not supply a universal valuation formula. The appropriate valuation assumptions depend on the issues, the legal position and any directions or order.

A useful engagement therefore separates legal instructions from financial judgments. It records whether the business is assumed to continue trading, whether any conduct is to be disregarded and whether the task concerns the whole equity or a specific holding. This prevents an apparently precise number from concealing incompatible assumptions. A tax market value assessment, for example, should not simply be substituted for a dispute valuation without checking that it answers the same question.

Reference framework:[1] IVSC[2] TCGA 1992, section 272[3] Companies Act 2006, section 994[6] Companies Act 2006, section 996

There is no single valuation date that automatically applies to every shareholder dispute. Depending on the relevant agreement, legal analysis or court direction, the exercise may concern an exit event, an earlier period or a later date. Choosing between those possibilities can have a substantial financial effect. The date should be settled through the legal instructions, rather than selected by the valuer because one set of accounts happens to be readily available.

The valuation date and the date of the financial information are not necessarily the same. Annual accounts may be several months old, requiring management accounts, bank balances and trading evidence to bridge the gap. A historical valuation needs information relevant to that historical position. It should not silently replace the risks and expectations at the time with certainty about what subsequently happened to the company, its customers or its market.

Later information requires particular care. It may help establish a condition that already existed at the valuation date, or it may describe a genuinely new development. For example, a later customer failure might illuminate an earlier collection problem, but it does not automatically prove that the whole loss was predictable. The report should explain what later evidence has been considered and why it is relevant under the instructed basis.

Where the date remains disputed, alternative-date valuations can make negotiations more focused. Each should use internally consistent financial information, market evidence and assumptions, rather than mixing an earlier profit figure with a later cash balance. The comparison can show whether disagreement is driven by trading changes, distributions, funding or market conditions. It cannot determine which date the parties are legally entitled to use; that remains separate from the valuation calculation.

Reference framework:[1] IVSC[5] ICAEW[6] Companies Act 2006, section 996

The valuation method should reflect how the business generates economic benefits and the evidence available. An established trading company may be assessed using maintainable earnings and comparable market evidence. A business with credible, differentiated future cash flows may support a discounted cash flow analysis. Asset-based approaches can be more relevant where value lies principally in identifiable assets. The existence of a dispute does not itself justify choosing the highest or lowest method.

Financial information often becomes contested because owners have unequal access to it. A disciplined process identifies the records needed, logs requests and distinguishes verified information from management representations. Signed accounts are an important starting point, but they may not resolve customer concentration, unrecorded commitments, related-party arrangements or the reliability of forecasts. Where records are incomplete, the valuer should explain the limitation and its effect, rather than manufacture certainty through an unexplained adjustment.

Forecasts need to be tested against the business’s actual resources and operating history. A forecast prepared after relationships deteriorate may still be useful, but its assumptions require scrutiny. The valuer should consider who prepared it, what information supported it and whether it reflects a realistic staffing and funding position. Both pessimistic and optimistic departures from earlier budgets need explanation, especially when they materially change the value attributed to the departing shareholder’s interest.

More than one method can provide a useful cross-check, but averaging incompatible answers is not a substitute for analysis. Different outcomes may reveal different assumptions about growth, investment needs or risk. The final conclusion should explain why one method carries greater weight and how market evidence has been assessed. In a dispute, that reasoning matters particularly because another adviser may need to reproduce the calculation and challenge its inputs.

Reference framework:[1] IVSC[4] IPEV[5] ICAEW

Disputes frequently involve allegations that remuneration, personal expenditure, connected-party charges or lost business have depressed reported profits. These matters can affect valuation, but an allegation is not an established fact. The valuer should identify the financial evidence, explain the possible adjustment and distinguish ordinary commercial expenditure from amounts challenged by a shareholder. Whether conduct was unlawful or unfairly prejudicial is not a conclusion to be reached merely by inserting an earnings adjustment.

An owner’s remuneration illustrates the distinction. If an owner leaves, the business may need to employ someone to perform the same work. Removing the entire salary would overstate maintainable earnings where a replacement cost remains necessary. Conversely, an evidenced payment above an appropriate commercial level may warrant an adjustment under the instructed assumptions. The analysis should address the services provided and the business’s needs, not simply whether the payment benefited one side.

Where facts remain unresolved, the report can show an evidenced base case and clearly labelled alternatives. A hypothetical company might have reported earnings of £500,000 and a disputed annual charge of £100,000. An instructed scenario that removes the charge would produce earnings of £600,000 before other adjustments. That does not establish that the charge was improper, nor does it mean equity value increases by exactly £100,000: tax, recurrence and the valuation method still matter.

Double counting is another important risk. Restoring profits for valuation purposes and separately including a related recovery or compensation claim may count the same economic benefit twice. Equally, an adjustment to recurring earnings may not capture cash already removed from the company. The valuer and legal advisers should identify precisely what each adjustment addresses, who owns any claim and which assumptions are authorised. Unsupported claims should not be treated as certain cash assets.

Reference framework:[1] IVSC[3] Companies Act 2006, section 994[5] ICAEW[6] Companies Act 2006, section 996

A shareholder’s percentage ownership is an important input, but it does not by itself determine the value of the holding. Voting rights, dividend rights, capital entitlements, transfer restrictions and contractual protections may all matter. Different share classes may participate differently in the same company’s value. The valuer therefore needs the articles, relevant agreements and details of outstanding rights, rather than relying solely on a headline percentage supplied by either owner.

Whether a holding should be valued proportionately or with a holding-level adjustment depends on the applicable basis and legal instructions. A valuation of a minority interest for an assumed market transaction should not automatically be imported into a court-related purchase. Equally, the presence of a shareholder dispute does not establish a universal right to an undiscounted percentage. The report should state explicitly how this issue has been addressed and who supplied the relevant instruction.

For illustration only, suppose a hypothetical company has an agreed equity value of £2 million, one class of ordinary shares and a departing owner holding 30%. A proportionate calculation produces £600,000. That arithmetic is not a conclusion about the appropriate purchase price. It assumes the equity figure is correct, the shares carry identical economic rights and the instructed basis requires a proportionate allocation without further holding-level adjustments.

Separate balances and payment terms also need attention. A shareholder loan is not necessarily part of the shareholding’s value and should be identified separately. Instalments, security and conditions can change the economic attractiveness of a proposed settlement even where the headline amount is unchanged. A valuation should therefore distinguish the shares’ value from the wider exit package, while legal and tax advisers address the implementation and consequences of the proposed purchase.

Reference framework:[1] IVSC[3] Companies Act 2006, section 994[5] ICAEW[6] Companies Act 2006, section 996

Start with the documents that define the question, not just the latest accounts. The valuer needs to know who owns what, which transfer provisions may apply and what issues the legal advisers consider unresolved. A short chronology is useful where ownership, management responsibilities or trading conditions have changed. It should distinguish agreed events from disputed allegations and identify the records supporting each material point, without presenting one party’s interpretation as established fact.

Financial preparation should make the company’s position traceable. Provide annual and management accounts, relevant forecasts, financing details and reconciliations for material balances. Explain changes in accounting policies, unusual transactions and dealings with connected parties. Where different versions of a forecast or management report exist, retain them and identify their preparation dates. Replacing an earlier version without explanation can obscure what was known at the relevant time and create unnecessary disagreement.

A coordinated information request can reduce duplication and delay. The parties’ advisers should agree an appropriate process for access, confidentiality and communications, particularly if one owner no longer works in the business. There should be a clear route for raising factual queries and correcting errors. Documents prepared for a dispute are not automatically privileged merely because a valuation is involved; obtain legal advice about the handling and circulation of sensitive material.

• Legal framework: articles, shareholders’ agreement, relevant transfer notices, court orders and the proposed valuation instructions.
• Ownership evidence: share register, class rights, options, shareholder loans and any rights affecting distributions or transfers.
• Financial records: accounts, management information, forecasts, bank and borrowing details, tax balances and material commitments.
• Trading evidence: key contracts, customer concentration, order book, staffing requirements and information supporting commercial assumptions.
• Disputed items: a schedule of proposed adjustments, each linked to evidence, the opposing position and any unresolved legal assumption.

Reference framework:[1] IVSC[5] ICAEW

An independent valuation can narrow disagreement by separating questions about evidence from questions about legal entitlement. Owners may discover that they largely agree on trading performance but disagree on the valuation date or treatment of a disputed payment. Showing those differences transparently can make settlement discussions more productive. It is usually more useful than exchanging unsupported headline figures that conceal different assumptions about the company and the proposed exit.

The expert’s role must be clear from the outset. An adviser assisting one party, an expert appointed under a contractual determination clause and an expert giving evidence in proceedings have different responsibilities and processes. Whether a determination is binding depends on the governing arrangement and law, not merely on describing the valuer as independent. Legal advisers should confirm the appropriate appointment and procedural requirements for the court and jurisdiction concerned.

Sensitivity analysis can identify what is commercially material. If resolving a particular expense has little effect on the overall conclusion, it may not deserve the same attention as a disputed valuation date or a major customer loss. Alternative assumptions should be supported and limited to genuine issues, rather than used to create an artificially broad range. A useful report explains both the preferred conclusion and the reasons why credible alternatives differ.

A valuation does not decide whether unfair prejudice occurred, compel a purchase or guarantee settlement. It supplies a reasoned financial assessment within defined instructions. Negotiated outcomes may also reflect payment certainty, litigation risk, confidentiality and the practical ability to fund a transaction. Those considerations should remain visible rather than being disguised as changes to business value. UK procedural requirements vary; Republic of Ireland disputes require separate Irish legal advice and instructions.

Reference framework:[1] IVSC[3] Companies Act 2006, section 994[5] ICAEW[6] Companies Act 2006, section 996

XVAL UK specialises exclusively in valuing businesses and unquoted shareholdings. In a shareholder dispute, the starting point is a human review of the purpose, documents and disputed issues, not an automated calculator. Enquiries receive a same-working-day review so that the likely scope, information requirements and next steps can be identified promptly. That review is distinct from completion of a valuation, whose timetable depends on complexity, evidence and the agreed instruction.

An expert-led assessment brings the financial analysis and legal instructions together without confusing their roles. XVAL can work with the instructing advisers to establish the interest, date and assumptions to be valued, identify missing information and assess the appropriate methods. Where an unresolved issue materially affects the answer, a clearly documented alternative scenario can show its financial significance without purporting to determine contested legal rights or facts.

The output should make the reasoning inspectable: the information relied upon, adjustments made, methods selected and limitations affecting the conclusion. This is particularly important when the valuation will be discussed with another shareholder, reviewed by solicitors or examined by another expert. The scope should also identify any separate work needed, such as forensic investigation or specialist asset appraisal, rather than implying that a business valuation establishes every underlying factual issue.

Fast progress comes from clear instructions, focused document requests and early identification of the points that matter. Independence does not mean supporting the number preferred by the person making the enquiry; it means reaching a supportable conclusion within the agreed basis. For an owner facing a difficult exit, that provides a more reliable foundation for decisions: a documented assessment of value, with legal assumptions and commercial uncertainties made explicit.

Reference framework:[1] IVSC[5] ICAEW

Questions owners ask

Frequently asked questions

Reference desk

Sources & further reading

Legislation states the legal provisions; HMRC manuals describe HMRC’s guidance. Professional standards and research guides inform valuation practice. Illustrations and commercial checklists above are explanatory analysis, not prescribed legal formulas or market benchmarks.

1. [1]IVSC — International Valuation Standards
2. [2]TCGA 1992, section 272 — Market value
3. [3]Companies Act 2006, section 994 — Unfair prejudice
4. [4]IPEV — Valuation Guidelines
5. [5]ICAEW — Business and share valuation
6. [6]Companies Act 2006, section 996 — Court powers

This article provides general technical information, not legal, tax or investment advice. Its application depends on the facts, the valuation purpose and rules in force at the relevant date. A reference to a professional body does not imply XVAL accreditation or endorsement. All numerical examples are hypothetical, not XVAL fees, client results or market evidence.