Show me the Money! What is your business or your share thereof really worth?

 Introduction

From the perspective of being a in a private company, the shareholders share in the profits of the Company, whilst directors manage the day to day business thereof.

It is also commonly accepted that shares (or shareholding in a company) represent the investment made by the shareholder and that similar to earning interest on an investment of money held in the bank, the shareholder ideally invests to get return on his/her investment.

According, to Henochsberg on the Companies Act 71 of 2008:

[A] share in a company consists of a bundle, or conglomerate, of personal rights entitling the holder thereof to a certain interest in the company, its assets, and dividends.”

Further, in terms of the Companies Act 71 of 2008 as amended, shares no longer have a nominal or par value (i.e. the stated value or face value). This means the return on investment or growth in the value of the share is not measured by way of the concept of the share premium as it were under the 1973 Companies Act. The share premium referred to the excess amount received over the par value of its shares forming part of the non-distributable reserves of the company.

 Valuation methods

The value of a share, i.e. other than its issue consideration (amount paid when acquiring the share), in any particular context involves a determination of what value is relevant in a particular context. As such, a valuation on death for estate duty purposes may have a very different result to the one when marketing and selling it during your life.

Moreover, in Rabinowitz NO v Ned-Equity Insurance Co Ltd 1980 (1) SA 403 (W) it was held that the value which was relevant for the purpose of determining an accurate statement of assets (in a proposal for insurance to cover estate duty). It was not the temporary market value of the shares, as quoted on a stock exchange. It was their permanent or intrinsic value. Furthermore, the court held that the identification of the value sought (or purpose of the valuation) directs by default the factors which are to be considered or discarded in determining such value. Therefore, if the valuation of the shares is done incorrectly for purposes of estate planning or business continuity planning; it may have dire consequences in insuring the shareholding though key person or other insurance policies when limiting business risk. In addition, poorly planned strategies may result in unforeseen tax consequences.

In Holt v Holt [1990] 1 WLR 1250 (PC) on the other hand, the permanent or intrinsic value at a particular date is not necessarily depending on the circumstances of the particular case. The value of the share may be determined by reference to the net asset value of the company or the fact that ownership of the share carries with it control of the company or the dividend-yield of the share or a combination of these and other factors. Therefore, it is clear that minority shareholding could carry a lesser value in comparison to the shares of a shareholder holding the majority of the shares. This further implies that minority shareholdings could be more difficult to sell and market even during the life of the shareholder.

To add to the complexity of these issues, the most contentious consideration regardless of the purpose of valuation, in my view, in determining the value of a share, is usually the computation of “goodwill.” Which generally considers a range of factors and also relies on many variables. For example, a company in the professional service industry or in family businesses; may have more value when the key providers or founders are at their prime and are alive and active in the business, versus when this is no longer the case.

The valuation of shares particularly in private companies is thus not a simple matter and depending on the purpose of the valuation i.e. in case of estate planning, death or continuity planning versus shareholder exist or buy outs; should be considered with the input from professionals.

 Conclusion

The value of a shareholders investment (shareholding) should be carefully considered and constructed before buying into a company or when continuity measures are considered. Clients are advised to seek professional guidance in this process and to construct a professionally drafted agreement with the assistance of an attorney.

 Nicolene Schoeman-Louw, SchoemanLaw Inc (Cape Town)

Tel: +27 (0) 21 425 5604

Email : enquiries@schoemanlaw.co.za

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About The Author

Nicolene Schoeman-Louw

I founded the firm Schoemanlaw Inc in 2007 aged 24 and am the Managing Director of the firm. I am an admitted attorney of the High Court of South Africa, as well as a Conveyancer , Notary Public and Mediator. I obtained my LLB degree cum laude and successfully completed my LLM degree (dissertation) in commercial law and B-BBEE at the University of the Free State. In addition I obtained my postgraduate diploma in financial planning (CFP) at the University of Stellenbosch. An abstract of my LLM dissertation was published in the Journal for Estate Planning in 2006 and is regularly published in De Rebus (the SA attorneys’ journal) as well as Without Prejudice and Polity.org (legalbriefs). I also write regularly for various online publications such as Spice for Life and other mainstream publications such as The Entrepreneur Magazine, Personal Finance Magazine and have a regular slot on SAfm’s The Law Report with Karen Key. For more information visit http://www.schoemanlaw.co.za/about-us/

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