Shareholder agreements and valuation clauses: what to check before you need them

Why the valuation clause matters more than people expect

A shareholder agreement is usually signed when the business is young, the owners are optimistic and nobody wants to talk about leaving. The valuation clause is often a paragraph or two near the back, copied from a template and rarely read again.

Then something happens. A founder retires, a director falls ill, or two owners stop agreeing. Suddenly that short paragraph decides how much one person receives and the others must pay, who picks the valuer, and whether anyone can challenge the result.

The time to test the clause is before you need it. Once a trigger event has happened, the parties want different outcomes, and changing the wording usually needs everyone to agree. Fixing it now is a calm conversation. Fixing it later can be an expensive one.

The events that usually set a valuation in motion

Most agreements list events that require, or allow, a shareholder's shares to be offered to the others at a price worked out under the clause. Common ones include:

• A shareholder choosing to leave and offering their shares to the others first.
• Death or permanent incapacity of a shareholder.
• Retirement, or a working shareholder ceasing to work in the business.
• A serious breach of the agreement, or a shareholder becoming insolvent.
• A deadlock that the owners cannot resolve, sometimes handled by a buy-sell or "shotgun" mechanism.
• An outside offer, where other shareholders have a right to match the price or join the sale.

Some agreements treat these events differently: a "good leaver" who retires or falls ill may receive full value, while a "bad leaver" who breaches the agreement may receive less. Whether a leaver provision works as intended is a legal question. For the valuer, what matters is that the clause says clearly which basis applies to which event.

Eight things to check in your valuation clause

1. 01Who values the sharesIs a person or firm named? People retire and firms merge or close. If the clause says a professional body will nominate a valuer, check that the body still offers that service. A clause that points to someone who no longer exists can stall the whole process.
2. 02What exactly is being valuedIs it the departing shareholder's parcel of shares, or a proportion of the value of the whole company? A 25% holder may receive a quarter of the whole, or the value of a 25% parcel on its own, which can be lower because it does not control the company.
3. 03The standard of value"Market value", "fair market value", "fair value" and "fair and reasonable value" are not interchangeable, and some agreements use them without defining them. If the term is undefined, two valuers can read it differently. A short definition saves argument later.
4. 04Discounts and premiumsDoes the clause say whether a discount for a minority interest or for lack of marketability applies? Many owners assume each shareholder gets a straight pro rata share. Unless the clause says so, that may not be what happens.
5. 05The valuation dateIs value measured at the trigger event, the date a notice is given, the last balance date, or something else? If the last audited or prepared accounts are many months old, how should the valuer account for what has happened since?
6. 06Expert or arbitrator, and whether reasons are givenMany clauses say the valuer acts "as an expert and not as an arbitrator" and that the decision is "final and binding". That wording has legal consequences, including how hard the result is to challenge. Ask your lawyer what it means for you, and whether the valuer must give written reasons.
7. 07Who pays, and how long it takesIs the cost split equally, paid by the company, or paid by whoever disputes the result? Without a timetable for appointing the valuer, a reluctant party can slow everything down.
8. 08Information and accessCan the valuer see the company's accounts, management reports, forecasts and key contracts, and talk to management? A departing shareholder may no longer have access. The clause should make the company provide what the valuer reasonably needs.

Fixed prices and formulas that nobody updated

Some agreements avoid a valuer altogether. They set an agreed price per share that the owners must update each year, or a formula such as a multiple of profit. These can work well when the owners keep them current. In practice, the annual update is often forgotten, so the agreed price reflects the business as it was years ago.

Formulas carry their own risks. A multiple of last year's profit can give an odd answer after an unusual year or a change in how owners pay themselves. A net asset formula may ignore goodwill entirely, which matters in a service business.

How the wording can change the number

Where tax comes into it

A price set under your shareholder agreement is a contract price. Tax law can look at value separately, and the two do not always line up.

• For capital gains tax, when the buyer and seller do not deal with each other at arm's length, the seller can be treated as receiving market value instead of the price actually paid. Shareholders in a private company are often related or closely connected, so your tax adviser may ask whether the clause price reflects market value.
• There is no single definition of market value for every tax purpose. The ATO's guidance says it generally looks at the process behind a valuation: a suitably qualified, objective valuer, a recognised method and evidence that can be checked.
• Under the CGT changes that start on 1 July 2027, Australian resident individuals, and trusts with at least one eligible beneficiary, holding shares or units through 30 June 2027 are generally treated as if they sold and bought them back at market value just before 1 July 2027. That makes 30 June 2027 the relevant valuation date for anyone who chooses to use a valuation.
• A valuation may not be the only option: a taxpayer may be able to use an apportioning method once one is made. A company’s own post-CGT assets are outside this rule, because companies cannot use the 50% discount.

A valuation under your agreement and a valuation as at 30 June 2027 for tax may share some analysis, but they answer different questions. The agreement may set its own standard of value, date and discount rules. Tell your valuer which question you need answered.

When to review the clause, and who does what

Look at the agreement again when a shareholder joins or leaves, when new shares are issued, when the business changes shape, and when the owners start thinking about succession. If nobody has read it for several years, that alone is a reason.

1. Your lawyer reviews the wording, the trigger events, the leaver provisions and how the agreement sits with the company's constitution.
2. Your accountant or tax adviser considers the tax effect of a buy-out for each shareholder and for the company.
3. A valuer can tell you whether the clause can be applied in practice: whether the standard of value is clear, whether the information will be available, and whether the timetable is realistic.

At Independent Business Valuation, we value private company shares and other business interests for owners, accountants and their advisers. If your agreement relies on an agreed value that has not been updated, a current valuation can give the owners a reasoned starting point for the next update. We do not draft or interpret agreements.

We charge one fixed fee of $999 + GST for a full valuation report on one business or ownership interest with annual turnover under $10 million. The fixed fee applies once we confirm the interest, purpose, structure and records fit the fixed-fee scope. Anything outside it is quoted in writing before we start. Fixed fee, confirmed in writing before we start. No hourly billing and no surprises. Where shareholders are already in dispute, or a court or tribunal is involved, the work is a separate engagement and is quoted in writing. If the shareholders are separating spouses or partners, we refer the matter to our dedicated family law practice, Family Law Valuations.