logo
spacer
spacer

 eWombat Search 
>
spacer spacer spacer
Latest Accounting News
Hot Issues
Business confidence hits 5-month high: NAB
Caution advised on best interests duty with cryptocurrencies
$20,000 asset write-off renewed for another financial year.
SMSF compliance traps with bitcoin
Where Australia is at. Our leading indicators.
Foreign resident CGT withholding: early recognition of tax credit
ATO set to doorknock as 60% of cash-heavy businesses caught
New downsizing cap available
Capital Gains and Renounceable Rights
Treasury finds Australia 'increasingly uncompetitive' as US moves on tax plans
Australia's vital statistics
Our Advent calendar for 2017
SMSFs warned on ‘ticking time bomb’ with outdated deeds
Taxation ruling on commercial website deductibility
68% of SMEs ‘significantly stressed,’ 85% rely on accountants
Statutory wills are underutilised in estate planning
Small business slips on lodgement deadlines
Articles archive
Quarter 4 October - December 2017
Quarter 3 July - September 2017
Quarter 2 April - June 2017
Quarter 1 January - March 2017
Quarter 4 October - December 2016
Quarter 3 July - September 2016
Quarter 2 April - June 2016
Quarter 1 January - March 2016
Quarter 4 October - December 2015
Quarter 3 July - September 2015
Quarter 2 April - June 2015
Quarter 1 January - March 2015
Quarter 4 October - December 2014
Quarter 3 of 2015
Articles
Individual Tax Returns – Medical Expenses 2015
Resources on our site to help you and your family.
Retirement Planning becoming more difficult
Salary and Superannuation after the death of an employee
Ambiguity in Shareholder Agreements - what you need to know
Five reasons the RBA will likely cut rates again
Consistency between Income Tax and Business Activity Statements (BAS)
Tax Time Checklist - Individual - 2015
Tax Time Checklist - Company Trust or Partnerships - 2015
Tax Time Checklist - Superannuation Funds - 2015
Ambiguity in Shareholder Agreements - what you need to know

 

When the debate comes as to the value of shareholdings many shareholders agreements provide very little assistance.



       


I just reviewed a valuation clause in an existing shareholder’s agreement for a company.


In summary the shareholders agreement sets out the following:


  • If the members or respective buyer and seller cannot agree value, the Company’s accountant must determine it on the request of any member, the value being the greater of:
    • The value of the Company in accordance with its balance sheet at the relevant time and without any updating of assets values for that purpose; and
    • The value of the Company by valuing it on a multiple of the average earnings of the Company before interest and tax for the last 3 years, where the multiple is determined by 2 valuers as agreed between the respective parties.
  • The deed then goes on and sets out how to appoint the 2 valuers and if the 2 valuers cannot agree on a multiple then it is to be the average
  • Finally the deed states that the valuation will be binding on the parties affected by it

The background of this assignment is that one of the minority shareholders is going through a marital split and his minority shareholding needs to be valued for family law purposes. And so now what??


Clearly the methodology as set out in the shareholders agreement is not binding in relation to a family law valuation but can and should be used as a guide for the independent family law valuer. Let’s assume that in this instance the husband will retain his shareholding and pay his ex-wife out in cash. It is then equitable that the valuation for family law purposes be valued on the same basis as if one of the husband’s business partners were to pay him out, after all, based on current circumstances, this is what the husband is likely to get for his shares into the future.


However the above gives no guidance for the family law valuer if for no other reason than there is no agreed multiple. Additionally the family law valuer will not be bound in his valuation approach. For example, he may decide not to value the business based on average earnings over the last 3 years, he may take into account future events. This likely leads to the family law valuer coming up with a different value than if one of the husband’s business partners were to buy him out, which in turn may lead to an additional legal fight and costs, and of the husband overpaying or underpaying his ex-wife when it all pans out.


The solution is the more specific the valuation clause in shareholders agreements the better. I believe the valuation clauses in shareholders agreements should refer to an annexed schedule which is an agreed worked example of the business valuation. This worked example should stipulate the process for arriving at maintainable earnings and should stipulate the agreed multiple. This annexed worked example can then be revised and if agreed amended by all shareholders in agreement allowing for changes in business circumstances. Much better to know where you stand up front and as much as possible take away the ambiguity. This would then in turn give concrete guidance to in this example the family law valuer.


 


Columnist:   Ross Mottershead
Wednesday, 05 August 2015 
accountantsdaily.com.au


 




2nd-September-2015