Role of Share Valuation in Shareholder Dispute

5 min readMay 6, 2024

Disagreements among business partners and shareholders are an unfortunate reality for any business, and they often involve things like the company’s value, how profits are shared, and how people get paid. To sort out these issues, a careful valuation of the business, known as a valuation, is often needed to support the arguments of each party and find a solution.

In business disputes, fair valuation is the compass guiding resolutions. It’s not just numbers; it’s a blend of insight and experience.

Even though companies try to prevent going to court by having agreements to solve problems, a thorough valuation of the company is still important, even if they don’t end up in legal trouble. Let’s understand the different kinds of shareholder disputes and how figuring out share valuation plays a big role in solving these problems.

What is a Shareholders Dispute?

A shareholder dispute occurs when a company’s owners (shareholders) disagree on important matters related to the business. These disagreements can involve company direction, management decisions, financial issues, or the distribution of profits.

Shareholder disputes can lead to legal conflicts and negatively impact the company’s operations and value. Resolving these disputes requires legal intervention, negotiation, or, in extreme cases, the sale of shares or the company itself.

Examples Some common shareholder dispute may include;

Director’s service contract violation.
Disparities in pay or the amount of work done.
A breach of a shareholder agreement has occurred.
Disagreements regarding the direction to be taken.
There are disagreements regarding the management of the company.
Minority shareholders do not get enough respect. Some common disputes among shareholders may include
Conflicts of interest
Difficulties in personal life and professional connections.
The lack of disbursing dividends.

What can Trigger a Shareholder Dispute?

Shareholder disputes can arise from various scenarios, often stemming from differences in opinions, expectations, or conflicting interests among the company’s owners.

Some common scenarios triggering shareholder disputes include:

Addressing shareholder disputes often requires effective communication, negotiation, and, in some cases, legal resolution. Shareholders should establish clear agreements and mechanisms for dispute resolution to minimize the potential for conflicts. Seeking professional advice and mediation can also help resolve disagreements and maintain the business’s stability.

What is Share Valuation and its approaches?

It is figuring out how much a company’s shares are worth. It involves looking at the company’s financial health and performance to estimate the fair value of its stocks. People use different methods for share valuation , such as:

Market-Based Approach:

This approach compares the company’s valuation to similar publicly traded companies.
The most common method within this approach is the “Comparable Company analysis (CCA).”In CCA, financial ratios such as Price to Earnings (P/E), Price to Sales (P/S), or Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) of the target company in comparison to those of similar publicly traded companies.
Another method is the “precedent transaction analysis,” which involves analyzing the valuation multiples of companies recently acquired in similar transactions.

Income-Based Approach:

This approach values a company based on its ability to generate income or cash flows in the future.
The most common method in this approach is the “Discounted Cash Flow (DCF) analysis,” which estimates the present value of the company’s future cash flows. DCF involves forecasting future cash flows, applying a discount rate to adjust for the time value of money, and arriving at a present value.
Another income-based method is the “capitalization of earnings model,” which values a company based on its expected future earnings and a capitalization rate.

Asset-Based Approach:

This approach values a company based on its net assets.
The “book value” method is a simple form of asset-based valuation, where the net book value of a company’s assets indicates its value.
The “liquidation value” method considers the value of a company’s assets if sold individually in a liquidation scenario. This may involve selling assets at a discount.

Why is Share Valuation during Shareholders’ disputes important?

Share valuation matters in shareholder disputes because it determines the fair value of each person’s stake in the company. When conflicts arise, shareholders might want to part ways, or someone may need to sell their shares.

The valuation is important for fair buyout agreements, ensuring everyone gets a fair share. It also brings transparency, making sure the financial picture is clear. Legal rules often require a fair valuation during disputes. Plus, it helps negotiations by providing a starting point and can be used as evidence in court if things get that far.

Case Study For Share Valuation during shareholder Dispute

Cadbury organized an extraordinary general meeting (EGM) on November 16, 2009, where most shareholders passed a special resolution approving the buyback of shares and reduction of capital. Two valuation reports were obtained from M/s Bansi S. Mehta & Co. and M/s SSPA & Co., indicating an Original Valuation Price of $ 16.11 per share. However, certain minority shareholders objected to this valuation. As a result, the Court directed a fresh valuation by an independent firm, as Cadbury sought the Court’s approval to settle the dispute with minority shareholders.

The independent firm initially assessed a value of $20.96 per share using the Comparable Companies Method (CCM) based on unaudited accounts up to July 2009. Subsequently, Cadbury incorporated the Discounted Cash Flow Method (DCF) for the shares into the valuation. The revised value returned was $ 24.23 per share (Revised Valuation Price), with equal weightage given to DCF and CCM methods, based on unaudited accounts as of September 2009. The Court ultimately approved the resolution based on the revised Valuation Report.

How do Appraisers and Experts help in Share Valuation during shareholder disputes ?

Appraisers and experts are those who help determine the value of shares. These professionals use their expertise to assess various factors contributing to a company’s worth.

They analyze financial statements, market trends, and the overall economic environment to know the company’s performance and potential.
By evaluating these aspects, appraisers and experts provide valuable insights into the company’s financial health, helping investors and stakeholders make informed decisions about buying or selling shares.
These experts consider qualitative factors such as the company’s management, competitive position, and growth prospects.

Through their evaluation, they aim to arrive at a fair and accurate valuation of the shares. This process helps investors understand the company’s value, enabling them to make investment decisions based on a comprehensive understanding of its pros and cons. Ultimately, the expertise of appraisers and experts is useful in ensuring a realistic and well-founded assessment of share value, contributing to a more transparent and informed financial market.

Get a Share Valuation for Shareholder Dispute from Eqvista!

Getting the right value for your stock is important when there’s a dispute between shareholders. To do that, you need good tools and materials. Eqvista is the go-to tool you want –for valuing shares.

If you’re in a shareholder dispute and need help figuring out how much your stocks are worth, Eqvista’s financial assessment, valuation techniques, and professional counseling can get you through it. Contact us right away to know more.