Director must honour independent valuation of shares

A director has been told he must honour an independent company’s valuation of his business.

The case involved a company that was owned by two directors who decided to go their separate ways.

The first director owned 60% of the business. While he didn’t have an official contract with the company, a lot of its success was down to the good relationships he had with contacts at other businesses. The second director owned the other 40% of the company.

The relationship between the two men broke down and they decided that the first director would buy out the shares of the second director. They brought in independent valuers to determine the price of the shares.

The first director believed that the independent company had overvalued the business. He said that the valuers had failed to take into account the fact that he didn’t have a contract. As he was responsible for a lot of the company’s success, the lack of a contract should have resulted in a lower valuation.

He began legal action saying that the independent valuation wasn’t intended to be binding. He said that the court should decide the value.

However, the court ruled that the valuation should stand. The directors had sought the advice of the independent company because they had wanted an expert opinion. There was nothing in the letter of engagement to the independent company that suggested that the final decision would then be taken by the court.

The judge ruled it wasn’t the job of the independent company to consider the lack of contract between the first director and the company, just the value of the company.

The Court of Appeal has upheld that decision.

Please contact Sing Li for any information about the issues raised in this article or any aspect of company law.