Shareholder Agreement Valuation Clauses in Australia

A shareholder agreement is a contract. Where the parties have agreed that an expert will determine a technical issue, Australian courts generally focus on whether the expert performed the contractual task. That makes the task itself critical.

A valuer can apply professional judgement to methodology and evidence, but cannot safely fill every contractual gap. If the clause leaves the basis of value or treatment of a minority interest unresolved, each side may advance a different interpretation and argue that the expert exceeded the mandate.

1. What triggers the valuation? Identify the event precisely: a voluntary exit, death, incapacity, default, deadlock, compulsory transfer, bad-leaver event or agreed buyout. Different triggers may justify different pricing rules.
2. What exactly is being valued? State the company, class and number of shares, or percentage interest. Clarify whether the task is to value the whole enterprise and derive the subject interest, or value the interest directly.
3. What is the valuation date? Fix an objective date or a clear formula. Avoid wording such as “at the time of exit” where one party can manipulate timing or where later events may contaminate the analysis.
4. What is the basis of value? Define market value, fair value, fair market value or another standard. The word “fair” is not self-executing and can imply different treatments in contractual, statutory and accounting contexts.
5. Do discounts or premiums apply? State the intended treatment of lack of control, lack of marketability, control premiums and special value to an existing shareholder. Silence can materially change the price.
6. What methodology or assumptions are permitted? Decide whether the expert has full methodological discretion or whether the clause prescribes or excludes particular approaches. Address forecasts, synergies, key-person risk and post-trigger events.
7. What information must be provided? Give the expert access to financial statements, management accounts, forecasts, contracts, customer data and management. Set deadlines and deal with non-cooperation or incomplete records.
8. Who appoints the expert and what qualifications are required? Include a fallback appointment mechanism and specify relevant business valuation experience, independence and any professional credentials required for the subject matter.
9. What procedure must the expert follow? Set timeframes, written submissions, replies, meetings, confidentiality, costs and whether reasons must be provided. A disciplined process reduces tactical delay.
10. How does the clause interact with other documents? Cross-check the constitution, pre-emption rights, drag and tag provisions, insurance arrangements, employment documents and any buy-sell agreement. Section 140 of the Corporations Act gives the constitution contractual effect in specified relationships.

An expert appointed under a valuation clause is not automatically an arbitrator or an expert witness. The role depends on the agreement and the instructions. The clause should state whether the appointee determines the question as an expert and whether the result is intended to be final and binding, subject to any contractual exceptions.

If reasons are required, say so. If each party may make submissions, define the process. If the expert may obtain independent information or meet management, authorise it. The objective is to reduce the risk that a procedurally sound valuation is later attacked because the clause did not permit the steps required to complete it.

APES 225 provides a professional framework for members delivering valuation services, including scope, documentation and reporting requirements. It can improve transparency and discipline, but it does not determine the parties’ contractual rights and it cannot repair a defective shareholder agreement.

The engagement letter should identify the valuation service being provided, the purpose, date, interest, basis of value, assumptions, restrictions and intended users. Those terms should be consistent with the shareholder agreement and any joint instructions.

• Obtain legal advice on the meaning and enforceability of the clause before instructing the valuer.
• Read the shareholder agreement and constitution together, including all transfer and pre-emption provisions.
• Agree the uncontested instructions and isolate the genuinely disputed assumptions.
• Provide alternative assumptions where a factual or legal issue cannot be resolved before the valuation.
• Use one controlled information set and record all submissions made to the expert.
• Confirm whether the output required is a valuation report, an expert determination, a single price or a range.

A well-drafted clause cannot prevent every disagreement, but it can prevent the parties from spending months arguing about the rules of the valuation before the valuation itself begins.

Selected references

– Corporations Act 2001 – Federal Register of Legislation

– High Court of Australia – Shoalhaven City Council v Firedam Civil Engineering Pty Limited [2011] HCA 38

– APESB – Valuation Services and APES 225

Editorial note and disclaimer: This article provides general valuation information and does not constitute legal advice or drafting advice. The enforceability and interpretation of a shareholder agreement depend on the contract, governing law and facts. Obtain advice from an Australian commercial lawyer.