Shareholder Disputes
By: Eli C. Neal
Shareholder disputes arise for all kinds of reasons. Maybe you and your partner no longer get along. Maybe you expected to be bought out at a certain price but that’s not what you were offered. Maybe you and your spouse own a business together but are getting divorced. Whatever the reason behind a shareholder dispute, if a buyout is needed, there are multiple considerations to think about throughout the process.
Engaging an Expert (or Experts)
In some shareholder disputes, we are jointly engaged by each party if that is what the operating agreement specifies. In others, we are hired by one side only, leaving the other party to hire their own expert. Hiring an expert jointly or separately from the other parties will depend upon your specific case. Whether we are hired jointly or separately, we will take care to gather the necessary information to carry out a thorough valuation of the business at hand.
Standard of Value
When taking on a shareholder dispute engagement, we will work with the parties and their attorneys to determine whether we will be valuing the relevant shares under Fair Market Value (FMV) or Fair Value (FV). Fair Market Value assumes a hypothetical arms’-length transaction between a willing and able buyer and a willing and able seller. Fair Value could determine the value of the shares to a specific buyer or indicate that discounts should not be applied. The facts of the case will determine which standard of value is to be used.
Governing Documents
As just mentioned, the business valuation performed will depend on the governing documents of the business. These might include bylaws, operating agreements, business plans, partnership agreements, or other contracts. What do these documents say about buyouts? Do they instruct a specific price per share or formula? Do they indicate the standard of value or method of valuation to be used? These documents may give instruction for how the valuation is to be performed.
Business Specifics
The specifics of the business itself also hold great importance in the shareholder dispute process. Where is the business in its lifecycle? Is the business unique, in a niche market, or growing? Were the prior 12 months of performance unusual compared to prior years? If the answer to any of these questions is yes, differing opinions on the value of the business could arise.
Valuations of profitable businesses are often based on the present value of future cash flows. To calculate this, business valuation experts must estimate future cash flows based on a combination of past performance, management’s expectations, and any projections or forecasts performed in the normal course of business. If a company has had an unusual performance in the 12 months prior to the valuation date or is growing, it might be more difficult to estimate future cash flows, as management and owners may have differing opinions on the business’s future performance. Receiving different information from owners can lead to disparities among the valuation experts hired in the case.
Final Thoughts
Although shareholder disputes can be difficult for all involved, we are here to help make the process easier by providing a clear, understandable value of the business. If you have any questions about how we work with shareholders throughout a buyout process, please give us a call or set up a time to talk.
4 Corners is located in the Greater Seattle area, serving clients in Seattle, Bellevue, Redmond, and all throughout the Pacific Northwest. If you are an attorney or business owner and believe you could use our help, please give 4 Corners a call at 425.800.4896 or email us; we’ll listen to your situation and help you scope your project. We’d love to help you.