Avoiding Share Valuation Disputes in Irish Companies
By Brendan Ringrose
Corporate lawyer and Partner
Whitney Moore Solicitors
17th Aug 2017
Disputes often arise in relation to the value of the shares in an Irish private company. This is often relevant when a shareholder in a company decides to sell his or her shares. The best way to avoid costly and time-consuming disputes or litigation in relation to the valuation of shares is to set out the procedure for determining the valuation in a shareholders’ agreement entered into beforehand between all shareholders of the company.
Differences in Valuation
The legislation or case law does not provide for any one accepted method of valuing shares in an Irish private company. Common valuation metrics are net assets, net present value, a measure based on past or estimated future profits or some hybrid of all three. In practice, experienced financial advisers using perfectly conventional valuation methods can arrive at very different valuations. Normally each of the parties to the dispute will have its own financial adviser provide a valuation setting out the relevant presumptions on which it is based.
A relevant example of how an Irish court will approach the question of valuation arose in Re Emerald Group Holdings Ltd. In that case, the Court decided to order the purchase by the Company of the shares held by the dissenting shareholder (the “petitioning shareholder”) in the Company. The Court reviewed the valuations proposed by both the petitioning shareholder and the company but ultimately substituted its own valuation. The Company argued that the full value of the shares should be discounted by thirty per cent. on the basis that the petitioner’s shares consisted of a minority interest. After considering both sides the Court decided that it would be reasonable to accept a discount of approximately 20% to allow for the minority interest. This highlights another critical question, which is often the subject of lengthy argument and delay, whether to discount the valuation for the fact of its being a minority shareholding. Since a minority shareholding discount can range from 5%, at the lower end, to, at the upper end, 40%, it can be very significant.
Should a “Discount” be Applied?
The Irish case law has followed some relevant decisions of the courts of England and Wales and often focuses on the question of whether the company in question is what the Court considers is a “Quasi-Partnership”. Many Irish private companies have been regarded as quasi-partnerships and it is long accepted by the Irish Courts that a quasi-partnership arises between shareholders where there exists a relationship of equality, mutuality, trust and confidence based on personal relationships. This frequently involves a small number of investors co-operating on an informal basis from the commencement of the business and who have not operated at arm’s length because of family connections or mutual affection.
There is precedent in several judgments of the Irish Courts (including most recently in Re Skytours Travel Ltd) that, where the Court is satisfied on the facts that a company is effectively a quasi-partnership, the Court will generally not accept any discount in relation to the value of the shares of a minority shareholder. Therefore the shares will be valued at 100% of the value arrived at using the method accepted by the Court. Therefore, other than in the case of a quasi-partnership, the Court will apply a discount for a minority interest.
The Next Step
If you are an Irish company seeking investment or are considering investing in an Irish private company, you should review carefully the arrangements for the sale and valuation of the shares. It would be advisable to set these out clearly (along with other provisions relating to corporate governance of the company which are not dealt with in this brief article) in a well-drafted shareholders’ agreement. Failure to do so, where a sale of the shares is proposed, could result in the risk of a costly dispute in relation to the value of the shares.
For more information or any queries about the content covered in this article, you may contact Brendan Ringrose at firstname.lastname@example.org.