Quantifying shareholding value can be challenging at the best of times but hypothesising a company’s value in a retrospective market can be even more taxing.
In Scotland, companies acquired or set up during a marriage will be treated as matrimonial property. To calculate the value of the business, experts will try to assess the company’s worth at the ‘relevant date’ which is the date that the parties separated. This means that the price used to consider matrimonial assets is not the present-day value of the company’s shares.
Experts will usually value the company on the basis that there is a willing buyer and willing seller sale. This means that that when valuing the company, you should normally assume that the seller will want to get the best reasonable price they can for the company and the buyer would be willing to pay that price.
Guidance on share valuation
Guidance on this has been provided by Lady Wise in the case of SCA v MMA [2020] CSOH 54. In SCA v MMA the husband owned various restaurants and held shares in assets in a holding company through a partnership mechanism with his father and also as a sole trader. When valuing multiple businesses, it was clear that more profit could be made if the corporations were restructured. A willing buyer would likely restructure the corporation to achieve the highest price and therefore the businesses were valued on that basis. Furthermore, on the relevant date, experts are to assume that the business would have been sold and therefore not run by either spouse. It is important that consideration is given to the fact that the hypothetical purchaser would have no personal goodwill to the business.
Some other factors that may be relevant are:
- Whether the business is sold as a going concern
- If there are business assets or equipment
- Staff salaries
- Repairs and maintenance
- Location of business premises
- Whether the business is wholly reliant on capital growth
Contingencies
Valuation can become more complicated when considering potential contingencies which could arise and how this would be factored into a hypothetical sale. The recent case of T v T CSOH 06 2021 provided a simple approach to share valuation in circumstances where there are contingent debts. One of the companies had significant debts due by way of a loan and also rental guarantees. The key question was, how would the company be valued when it had significant contingent debts which could reduce the company value if they were to crystallise. Lady Wise confirmed that contingent debts would not reduce the net value of the company either in general or in commercial valuations in respect of matrimonial proceedings.
An interesting point was that the business was sold in the interim period. Although the sale was after the relevant date, Lady Wise did state that it was appropriate to use hindsight to crosscheck the price of the actual sale against that of the sale at the relevant date.
Establishing the value of shareholdings can be complicated and individual businesses will have unique considerations to factor into their valuations. A topical consideration will be valuing businesses during the COVID-19 pandemic, due to the volatility of the market. We expect to see further developments in this area.
If you have any queries about company valuation or matrimonial property division in divorce proceedings, please speak to one of our experienced members of the Family Law team.
