Navigating Shareholder Disputes: Strategies and Valuation Challenges in Minority Shareholder Claims
Market Insight 09 October 2023 09 October 2023
UK & Europe
Minority shareholders can often feel aggrieved and mistreated whether or not they are involved in the management of the company. Common complaints include failure to pay dividends; excessive remuneration of directors; mismanagement; the misuse or misappropriation of company assets and dilution of their shareholding by a rights issue or otherwise.
In the absence of anything in the company’s articles or a shareholder’s agreement to assist them, this can often only leave the threat and/or issue of an unfair prejudice petition as the only realistic option for redress.
The most common outcome of such a step is for the minority’s shares to be purchased by the majority at a fair value. However, the valuation process is often fraught with difficulties given the competing interests and the various methods of valuation available with both sides normally putting forward expert evidence to support their claims.
The court has a broad discretion to do what is fair in determining the appropriate valuation methodology. These include methods such as a discounted cash flow valuation; an adjusted net assets approach or a market valuation by reference to comparable transactions involving minority interests. However, the most common method of valuation where the business is a going concern is generally a capitalised maintainable income approach which involves calculating the value of the business based on current earnings and expected future performance and applying an appropriate multiplier often between 1 and 3 for small to medium sized businesses.
The valuation exercise is further complicated as it is open to the seller to argue that the valuation should be adjusted due to a number of factors including accounting for unpaid dividends, restoring misappropriated assets, treating directors’ loans as having been repaid with interest, and adding back in losses occasioned by breaches of fiduciary duty or excessive remuneration. Additionally, there are invariably arguments from the buyer that a discount should be applied to the purchase price to reflect the seller's minority interest.
It should also be noted that even if agreement for the sale of the minority shareholder’s interest is agreed or ordered, then this will not in itself release them from any restrictive covenants in any shareholders agreement on employment contract. This can be particularly important given that the sale will often involve the seller either having left or leaving the business and that restrictive covenants in shareholders agreements are more likely to be interpreted as being reasonable, and therefore enforceable.
It may be that a release can be negotiated as part of any settlement, but this may be difficult given that the management will be keen to protect the business’s interests.
Clyde & Co can advise both management and shareholders on the process and strategy of shareholder disputes including guidance on a range of outcomes, contact and relationship with valuation experts, negotiation and management of any litigation as a last resort.