In an attempt to remove uncertainty regarding the determination of fair value, we always recommend that agreed valuation provisions be included in a shareholders’ agreement, memorandum of incorporation or other constitutional documents.
As a minimum, such provisions should always include:
- the third-party expert responsible for providing the valuation and how such party be selected;
- the agreed formula or approach to be taken in determining the value;
- the circumstances in which a valuation will be required; and
- the period in which the value must be determined.
Ideally these provisions should be included when agreements are initially signed but can be agreed at a later stage. This is particularly important where the current agreements only refer to a vague definition of ‘fair value’ or ‘market value’ without any real substance (which will be just as problematic as not inserting any definition at all).
This may also result in costly and lengthy litigation or arbitration to settle the issue, should it arise.
I read this and thought it was interesting.
