• BusinessValuation

Terms of Value - Shareholders Agreement

This is related to a fair compensation for an equity interest in the company.


Shareholder agreements tend to have vague terms of ‘value’ and can be understood in various ways - this can influence the resulting value of an equity interest, making it biased.

Since standard terms like ‘fair market value’ and ‘fair value’ can also be interpreted in many ways depending on the situation, it is vital for a shareholder agreement to have an explicit definition of ‘value’ for every identified ‘triggering event’.


For this, a shareholder agreement should handle the following concerns to define the terms and conditions of value:


En Bloc Equity Value

The shareholders need to decide the way to work out this value - should special purchasers be included in the denominator, or just the existing shareholding.


A special purchaser can be a competitor, a customer or a supplier of the company who realises the company’s potential in post-merger synergy, and is ready to pay a premium greater than the company’s basic value.


Realistically, without the open market negotiations, the measurement of post-merger synergy is conjectural. Hence it is more substantial to use the company’s basic value to determine this value.


Minority Ownership Discount

Shareholders need to decide where to include or exclude this discount, which considers the interest of a minority shareholder who is not entitled to make unilateral decisions for the company.


A minority ownership discount will result in a value lower than the prorated en bloc fair market value, which tallies with the voting shares of the minority shareholder.


Most shareholder agreements would indicate clearly that they do not use the minority ownership discount.


Financing of the Acquisition

Shareholders need to detail the source of funds for the company to buy the shares of a leaving shareholder. As the company’s revenue can be used, this will impact the en bloc equity value and subsequently the prorated value of any related interests.


Acquisition of Shares from Deceased Shareholder

When the company uses its insurance claims to buy over the shares of the deceased shareholder, the shareholder agreement would have clear instructions on the proper considerations for these claims with regards to the en bloc equity value. These instructions should be based on the shareholders’ prior mutual agreement.


There should be caution that ignoring these claims from the en bloc equity value may expose the remaining shareholders to gains that they would only get when a shareholder passes on.

The shareholder agreement should also define the payment terms and conditions of the transactions in every identified ‘triggering event’. For example, a cash-equivalent transaction is usually intended for ‘fair market value’; and the consequences of late payments or non-payment of market rates of interests should be accounted for in the en bloc equity value.


What happens when a minority shareholder exits the company?


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