When an unfair prejudice petition succeeds, the court will typically order that the petitioner’s shares be purchased by the majority shareholders or, in some cases, by the company, and determine the price at which those shares are to be bought out. That valuation exercise is often the most contested part of the proceedings. While the buy-out itself is frequently uncontroversial, determining “fair value” rarely is. 

What does “fair value” mean?

“Fair value” is not defined exhaustively in the legislation. Instead, it is a concept developed through case law, with the court exercising a broad discretion to determine what is fair in the circumstances of the particular case and to decide what is fair between the parties, rather than applying rigid valuation rules. 

The court will seek to identify the value that the petitioner’s shares would have had in a fair commercial context, without the distortive impact of the unfair prejudice. That makes valuation in unfair prejudice claims materially different from a conventional market sale analysis. 

Relationship, conduct and valuation

As with the unfair prejudice analysis itself, valuation is a fact-sensitive exercise. The court will consider the nature of the company, the relationship between the shareholders and the conduct giving rise to the claim. In appropriate cases, it may also adjust the valuation to reflect the consequences of the unfair conduct. 

This can include reversing the effects of improper transactions, disregarding value transfers to the majority, or ensuring that the petitioner is not disadvantaged by actions taken in breach of duty. The objective is to ensure that the valuation reflects what the petitioner’s interest would have been worth but for the unfair conduct. 

Going concern basis

In most cases, shares will be valued on a going concern basis, rather than on a break-up or liquidation basis. The court’s focus is therefore on the value of the company as a functioning business, taking into account its earnings, assets, prospects and overall performance. 

This approach reflects the commercial reality that the petitioner is being forced to exit an ongoing enterprise, rather than selling their interest voluntarily in the open market. A break-up valuation will be appropriate only in more limited circumstances, for example where the company is no longer viable as a going concern or where its value is more accurately reflected by the realisation of its underlying assets. 

Minority discount

One of the most important – and frequently disputed – questions is whether a minority discount should be applied. In a conventional valuation, a minority shareholding is often discounted to reflect the lack of control associated with that interest. However, in unfair prejudice claims, the court will often disapply such a discount, particularly where the petitioner has been excluded from the business or where the relationship between the parties resembles a quasi-partnership. 

The rationale is straightforward: it would generally be inequitable for a majority shareholder to benefit from their own unfair conduct by acquiring the minority’s shares at a discounted price. That said, the position is not absolute. The court will consider the specific circumstances of the case, including the nature of the shareholding and the basis on which the investor entered the company. 

Expert evidence

The court will typically rely on expert evidence, with valuation experts instructed by each party, or jointly, to assess the company’s worth using established methodologies such as earnings multiples, discounted cash flow analysis or net asset value, depending on the nature of the business. 

In practice, valuation disputes are driven largely by expert evidence. It is common for each party to instruct forensic accountants or valuation specialists, and the court may require a joint statement identifying areas of agreement and disagreement. Much of the dispute will turn on technical issues, such as the appropriate methodology, assumptions and adjustments, making early expert input critical in shaping both the outcome and the parties’ settlement positions. 

Valuation is often the real battleground

In unfair prejudice claims, the real battleground is frequently the valuation of the shares. A clear understanding of how fair value is assessed – particularly in relation to minority discounts, valuation dates and adjustments for unfair conduct – can materially affect both the strategy and the outcome of the dispute. 

At Maybrook Law, we advise on all aspects of shareholder disputes, including unfair prejudice petitions, working closely with valuation experts to ensure that legal strategy and financial analysis are aligned to achieve outcomes that protect value and withstand scrutiny. If you are dealing with a shareholder dispute – or anticipating one – or would like to discuss any of the issues raised in this article, we would be pleased to advise on your position. 

Our insights, articles and guides do not, and are not intended to, constitute legal advice or be an exhaustive review of all legal developments. Although every effort is made to ensure that the information provided in this article is accurate as of the publication date, please be aware that this is area of law may be subject to change. Please seek legal advice before applying the information provided to any specific circumstances, transactions or legal issues.