How are shares valued in a shareholder buyout?

A shareholder buyout has no single valuation rule. The price comes from whichever route applies: a price mechanism written into a shareholder agreement, a negotiated figure supported by a valuation, or, in some corporate-law disputes, a court. Start by finding out which route you are on, because it decides who sets the number and what the number is meant to represent. Read the shareholder agreement first, then the statute that governs the corporation. Federal and provincial corporate statutes are separate, so a provincially incorporated company follows its own province’s Act.

Start with the agreement

Check whether the shareholder agreement says how shares are priced on a buyout. Look for a formula, an agreed value that is updated on a schedule, a named valuator, or a method for choosing one. The Canada Business Corporations Act (CBCA) recognises a unanimous shareholder agreement, and a purchaser or transferee of shares subject to one is deemed to be a party to it (s.146(3)), subject to a right to rescind under s.146(4) if they were not given notice of it. A buyer of shares should therefore ask for a copy before agreeing a price. Whether an old mechanism still suits the business is a question for a lawyer.

When the price is negotiated

Without a mechanism, the owners negotiate. BDC says each valuation method may yield a different value, and that methods and levels of detail each come with a different cost and level of assurance. It says hiring a chartered business valuator is helpful for an objective view. For a buyout between owners, consider agreeing the valuator, the valuation date and the method before the number arrives. BDC also says a valuator’s figure is just a guideline and the final transaction price is often different, influenced by factors such as financing and due diligence.

When the law fixes fair value

Under the CBCA, a shareholder who dissents from certain fundamental changes and complies with the dissent procedure is entitled to be paid the fair value of their shares, subject to the solvency limit in s.190(26) (s.190(3); see s.190(1) and (2) for which changes). The corporation’s written offer must come with a statement showing how fair value was determined (s.190(12)). If no offer is made or it is not accepted, the corporation may apply to a court to fix the fair value; if it does not, the shareholder may apply, and the court may appoint appraisers to assist (s.190(15), (16), (21)). A complainant, which includes a shareholder (s.238), can apply under s.241. If the court is satisfied that conduct is oppressive or unfairly prejudicial to, or unfairly disregards, the interests of any security holder, creditor, director or officer, it may make any interim or final order it thinks fit, including directing a purchase of securities, subject to s.241(6). Provincial statutes have their own dissent and remedy provisions.