It is always best practice when entering into a business arrangement to ensure you enter into an enforceable shareholder or partnership agreement to ensure that if any problems arise in the future the agreement will provide details around how different issues should be dealt with if the shareholder relationship were to breakdown.
Unfortunately, these agreements are frequently inadequately drafted in respect of establishing the basis by which the value of an equity interest is to be determined. There is such a wide range of issues that can arise that the likelihood of your shareholders agreement covering all possible disputes that may arise is unlikely. These deficiencies can result in unanticipated consequences and costly litigation when parties involved disagree on the meanings and intentions of the agreement.
This article considers valuation clauses in shareholder and partnership agreements, providing insights into how such matters may be considered.
The Basis of Determining Value
These agreements sometimes specify how value is to be determined in various circumstances with the most common being:
- Agreement by shareholders;
- Predetermined formula;
- Independent expert;
- Arbitration or mediation, and;
- A combination of 3 and 4 when there is a disagreement between experts.
Generally, in most dispute matters where the relationship has broken down, it is often impossible for the shareholders to come to an agreement of the value of the entity.
In our experience, valuation clauses are generally overlooked when these agreements are drafted which can lead to further disagreement between shareholders. Noting this, we believe it is best to review the agreement proactively before any issues arise and amend the agreement to include a detailed valuation formula that will clearly demonstrate how value is to be calculated.
Including a detailed valuation formula as part of your agreement can also ensure that if you need to issue any shares to additional shareholders, such as employees, the business can easily calculate an indicative value of the equity at a point in time that is easily demonstratable to all parties involved.
Find Out More
Groves & Partners are expert business transaction advisors and valuers, with significant experience in advising clients on suitable and commercially sound valuation formulae for use in shareholder and partnership agreements.
If believe you may benefit from having a detailed valuation formula for inclusion in a current or proposed partnership or shareholder agreement and would like to know more about how we can work with you, contact us on 1300 892 717 or email info@groves.com.au.