Fair Value vs Market Value in a Shareholder Dispute

When a shareholder wants to leave, or a dispute leads to a forced sale, the distinction between fair value and market value can change the outcome. It matters particularly when a minority shareholder faces a forced exit.

In the UK, the articles of association, dispute route and facts all matter. This guide explains the practical distinction for SME directors and shareholders, including why an independent, evidence-led valuation report from Consult EFC can reduce uncertainty and support a credible position. Talk to Consult EFC – an ICAEW-regulated Corporate Finance Advisory firm today.

Key Takeaways

• Different valuation bases. Fair value often reflects a proportionate share of the whole company, without applying a minority discount.
• Market value assumes an open-market transaction. A minority shareholder’s holding may be discounted for limited control and marketability.
• Under sections 994 and 996 of the Companies Act 2006, courts commonly consider unfair prejudice buyouts. The facts and valuation date still matter.
• An independent UK business valuation should explain its method, evidence, assumptions and adjustments clearly enough to withstand challenge.
• The articles of association, shareholders’ agreement and dispute route can affect both the valuation basis and the final amount payable.

Fair Value vs Market Value in a Shareholder Dispute: What Is the Difference?

The valuation basis can change the amount payable by hundreds of thousands of pounds. A shareholder dispute therefore needs more than a headline company valuation. The report must identify what is being valued, why it is being valued and which discounts are appropriate.

In simple terms, market value asks what the shares might sell for between a willing buyer and willing seller in an arm’s-length transaction. Fair value asks what compensation is fair in the circumstances of the dispute. The two figures may be close, but they often diverge when a minority shareholder is forced to exit.

Why minority discounts can change the result

A minority shareholder’s interest is not always worth the same proportion of the company as a controlling block. A buyer in the open market may pay less for 25% of a private company because the buyer cannot direct decisions, appoint management or force a dividend. The shares may also be difficult to sell.

Those factors can produce two different outcomes:

• Pro rata fair value treats the holding as its proportionate share of the whole business.
• Market value treats the holding as a separate investment, with potential discounts for lack of control and lack of marketability.

A minority discount may therefore apply under an open-market assessment, although it is not automatic.

Consider a company valued at £4 million, with the assumptions that the shares represent 25% of the equity and no other adjustments apply. A simple pro rata figure is £1 million. That may be the starting point for a fair value assessment in an unfair prejudice dispute, particularly where the shareholder has been excluded from the business or is not leaving voluntarily.

Under a market value approach, the same 25% holding could be discounted. If combined discounts reduced the value by 50%, the resulting figure would be approximately £500,000.

This minority discount illustration is not a guaranteed result. The discount could be lower, higher or not applied at all. The outcome depends on the company’s articles, any agreement between shareholders, the relationship between the parties, the reason for the exit and the valuation instructions.

A minority discount can value the shares as a difficult investment to sell, rather than as a fair proportion of the underlying business.

UK courts may refuse to apply a discount in section 994 unfair prejudice proceedings where doing so would penalise a minority shareholder who was effectively forced out. A quasi-partnership may also support a proportionate approach in a closely held business. That does not create an automatic rule. The evidence and legal setting still control the analysis.

A documented UK company valuation process should explain the valuation methodology, starting equity value, ownership percentage, proposed discounts and reasons for each adjustment. Unsupported percentages are unlikely to resolve a serious dispute.

Why fair value does not always mean a higher value

The appropriate figure is context-sensitive. It does not mean the highest possible amount, and it is not a universal formula that removes every discount. The court may consider the company’s value as a going concern, the circumstances of the proposed transaction, information unavailable to a hypothetical buyer, the parties’ agreement and the purpose of the valuation.

For example, an agreement between shareholders may contain a specific valuation mechanism. The articles may also set rules for transferring shares. If those documents address discounts, they can materially affect the analysis. A court-ordered buy-out under section 994 may require a different approach from a voluntary sale, tax valuation or investment transaction.

The term fair market value is often used loosely. It usually describes an arm’s-length market price, meaning what a buyer might pay a seller in an open transaction. That differs from dispute-related fair value, where the focus is often fair compensation rather than the likely price for a restricted minority investment.

A valuation report must state the valuation standards clearly. It should connect the chosen standard to the dispute documents, the date of valuation, financial evidence and intended use. The phrase fair market value should not be treated as automatically equivalent to the figure required in a shareholder dispute. That evidence-led process helps prevent a convenient number being treated as an agreed answer.

How UK Courts Choose the Right Valuation Basis

UK courts don’t use an online calculator or one fixed formula when valuing shares in a dispute. The legal route, governing documents and evidence all shape the outcome. The court first identifies the valuation’s purpose, then selects an approach that fits the facts.

Unfair prejudice claims under section 994

A section 994 claim under the Companies Act 2006 applies where the company’s affairs have been conducted in a way that unfairly prejudices one or more shareholders. If the claim succeeds, section 996 gives the court wide discretion. A common remedy is an order requiring the company or another shareholder to buy the petitioner’s shares.

In that situation, the court often starts with a fair value approach. The aim is to compensate the shareholder fairly, rather than ask what a buyer might pay for a restricted minority holding in an ordinary market transaction.

That distinction matters. A fair market value assessment may reflect the position of a restricted minority investment, including a minority discount. Those adjustments can reduce a 25% shareholding to substantially less than 25% of the company’s total equity value. A court may therefore consider whether that outcome is appropriate in a forced exit.

The authorities don’t create an automatic result. In Re Bird Precision Bellows Ltd, the court considered the relationship between the shareholders and the circumstances of the buy-out when assessing value. Re London School of Electronics Ltd supports looking beyond a rigid market-price approach where that would not produce a fair outcome on the facts.

The equitable and fact-sensitive nature of unfair prejudice relief is also reflected in O’Neill v Phillips. That case does not create an automatic rule on discounts or replace the valuation authorities above. It does, however, reinforce the need to assess the parties’ conduct, expectations and the appropriate remedy together.

The court may still adjust the valuation for misconduct, value transferred from the company or other relevant events. Each claim requires its own legal and financial analysis, so you should obtain advice on the specific allegations before setting valuation instructions.

Articles of association and shareholders agreements

Before anyone builds a valuation model, review the articles of association and shareholders agreement. These documents may already contain the framework for a compulsory transfer or shareholder exit.

The wording may specify:

• A fair value or market value basis.
• A particular valuation date.
• An independent accountant or valuer.
• The median of two separate valuations.
• A going-concern valuation.
• A compulsory transfer process, including notice and payment terms.

Those provisions can change the valuation exercise. In a quasi-partnership, the relationship between the shareholders may form an important part of the factual context. In Cosmetic Warriors Limited and Lush Cosmetics Limited v Andrew Gerrie, the contractual wording was central to how the shares were to be valued.

The court’s approach depends on the agreed terms, not simply on a general preference for one valuation basis. This can be especially important where a quasi-partnership creates expectations about participation, management or a fair exit.

That is why any financial analysis should quote the relevant provisions and explain how they affect the instructions. A model prepared without those documents may calculate the wrong number accurately.

The valuation date, evidence and expert process

The valuation date can move the result materially. Possible dates include the petition date, the date of judgment or another date selected because unfair conduct affected the company’s value. Historic conduct, post-dispute performance and management changes may also require careful analysis.

The valuer will usually need management accounts, budgets, customer information, debt details, shareholder correspondence and evidence about the company’s operations. The business may be valued as a going concern, using maintainable earnings, an EBITDA multiple, discounted cash flow or another suitable method. The choice depends on the company’s size, sector, financial records and available evidence.

The selected valuation date should be recorded clearly in the instructions. The parties should also explain whether the exercise considers the company as a whole or the position of a minority shareholder.

Where the parties cannot agree, the court may appoint or direct an independent expert, sometimes as a Single Joint Expert. An independent expert may provide expert evidence under the court’s procedural rules, usually by giving an opinion rather than deciding the dispute.

An expert determination is different. Under a contract, the expert decides the valuation question within the authority granted by the agreement. A Single Joint Expert assists the court, while contractual determination may provide a form of dispute resolution. The court retains power to decide the litigation and determine the appropriate remedy.

A documented business valuation process should therefore separate the financial assumptions from the legal instructions. For help assessing the valuation evidence, Talk to Consult EFC – an ICAEW-regulated Corporate Finance Advisory firm today.

How to Build a Defensible Share Valuation for a Dispute

A defensible share valuation does more than produce a number. It connects the legal question to financial evidence, assumptions and the chosen methodology. That connection matters when another shareholder, solicitor or court challenges the result.

Start by defining the valuation date, the interest being valued and the applicable standard of value. Later events and evidence must be considered by reference to that date. Then build the analysis from reliable records. An independent valuation report should make each step clear enough for another professional to follow and test.

Select the method that fits the business

There is no single valuation method that works for every company. The valuation methodology must fit the business model, financial history, growth prospects and quality of the available forecasts.

For a profitable SME, a maintainable earnings assessment and normalised EBITDA multiple are often practical starting points. The valuer may adjust EBITDA for one-off costs, unusual income, excessive director pay or personal expenses that would not continue under independent ownership. An earnings multiple can be suitable where historic maintainable earnings provide a reliable guide to future performance.

A price earnings multiple measures equity value against post-tax earnings, unlike an EBITDA multiple. It should only be used where the earnings measure and comparable evidence are appropriate. A second price earnings multiple should not be treated as automatically superior for an SME.

Revenue multiples may be more relevant for certain high-growth businesses, particularly where current profit is being reinvested into expansion. That approach still requires careful analysis of margins, growth quality and the cost of acquiring revenue. A high turnover figure does not automatically indicate high value.

A discounted cash flow valuation can be appropriate where the company’s value depends on detailed forecasts, contracts, product development or a clear path to future profitability. The forecast period, terminal value, discount rate and sensitivity analysis must be supported by evidence. A spreadsheet is not a substitute for judgement.

Asset-based methods may be more suitable where property, equipment, investments or other identifiable assets drive value. An asset basis can also provide a useful cross-check where earnings are weak or the business is not being valued primarily as a going concern.

Comparable trading data and completed transactions can support the analysis. They cannot replace professional judgement. Private companies differ in size, risk, margins, customer concentration, ownership structure and prospects.

For SaaS businesses, the analysis may need to go beyond EBITDA and revenue. Recurring revenue quality is often central. The valuer should examine:

• Annual recurring revenue (ARR) and its growth rate.
• Customer churn and retention by cohort.
• Customer acquisition cost (CAC) and payback period.
• Lifetime value and gross margin.
• Net revenue retention, including expansion and contraction revenue.

The selected method should explain why it fits the company and why other methods carry less weight. The report should state its assumptions and the applicable valuation standards. That reasoning is part of the evidence.

Test discounts, control and marketability assumptions

A lack of control adjustment reflects the reduced influence attached to a minority shareholding. A lack of marketability adjustment reflects the difficulty of selling shares in a private company, particularly where there is no active market.

Both discounts can be disputed. A minority discount should not be inserted automatically because the shareholding is below 50%. Ask practical questions instead. Can the minority shareholder vote on key matters? Do they have information rights, board representation or veto rights? Are transfers restricted? Is there a realistic buyer for the shares? Has the company paid dividends, or has value been retained for growth?

The parties’ conduct also matters. A minority shareholder forced out after unfair treatment is not necessarily in the same position as an investor choosing to sell a restricted minority holding. In a quasi-partnership, a section 994 unfair prejudice remedy may support a proportionate fair value approach, with no minority discount. A contractual sale, tax valuation or arm’s-length transaction may instead be assessed on fair market value, with market value depending on the relevant assumptions and evidence.

A discount must follow the legal basis and facts. It must not be a standard percentage copied from a previous valuation.

The report should show the effect of each minority discount separately, explain the evidence supporting it and provide sensitivity analysis where appropriate. Expert evidence should support the assumptions and any adjustment. This makes the disagreement visible instead of hiding it inside one unsupported figure.

Gather the records that support the number

The quality of the valuation depends heavily on the records behind it. Request the evidence in a structured order:

• Articles of association, shareholders’ agreement and the current cap table.
• Statutory accounts, management accounts and tax returns.
• Budgets, business plans and cash flow forecasts.
• Debt schedules, shareholder loans and details of security.
• Customer and supplier contracts, including renewal and termination terms.
• Director remuneration, related-party transactions and unusual expenses.
• Board minutes, shareholder communications and relevant correspondence.

These documents help establish both the company’s financial position and the circumstances surrounding the dispute. Board minutes may show when a shareholder was excluded. Contracts may support forecast revenue. The cap table confirms the legal interest being valued.

Gaps create risk. Inconsistent financial reporting, unexplained related-party payments or forecasts that do not match historic performance can weaken credibility and increase professional costs. Provide the full record early, identify missing information and explain any accounting inconsistencies before they become a point of attack. An assessment is easier to defend when the evidence is complete, reconciled and clearly linked to the assumptions.

What Shareholders Should Do Before Negotiating a Buyout

A buyout negotiation should not start with two shareholders arguing over competing figures. Start by confirming the legal route, valuation instructions and evidence. A voluntary sale may use market value, while a forced or court-directed exit may require a different basis. Early preparation helps reduce delay, protect company cash flow and create a sensible basis for settlement, although a valuation alone won’t resolve the underlying legal dispute.

Check the documents before arguing about the price

Before commissioning valuation work, identify how the proposed exit is meant to happen. Is it a voluntary sale, a compulsory transfer under the articles, a contractual buyout, an unfair prejudice remedy or a management buyout? Each route can produce different instructions for the valuer.

Review the articles of association and shareholders agreement carefully. Look for:

• Compulsory transfer provisions and trigger events.
• Notice periods and service requirements.
• The required valuation date.
• Wording such as fair value, market value or fair market value.
• Any provision dealing with a minority discount.
• The appointment process for an independent expert.
• A dispute procedure, expert determination clause or dispute resolution mechanism.
• Payment terms, including instalments, interest and completion conditions.

The wording matters. A valuation can be technically sound but still answer the wrong question if the contractual provisions were ignored. A useful MBO valuation guide can help explain the commercial issues, but you still need to apply the actual documents governing your company.

Keep a clear record of the date supplied to each expert. Also record the information provided to each expert, including management accounts, forecasts, correspondence and explanations of unusual items. If one expert receives a fuller picture than the other, the reports may not be comparable.

The first question is not “What are the shares worth?” It is “Which valuation question are the documents and dispute process asking?”

Compare assumptions, not just headline figures

Two reports can produce different share prices without either report containing an obvious calculation error. The difference may sit in the assumptions beneath the final figure.

Compare the reports using the same structure. Review revenue quality, customer concentration, recurring income, churn and contract visibility. Then test maintainable earnings, including normalised director remuneration, one-off costs, related-party transactions and unusual expenses.

The balance sheet also needs attention. Check working capital requirements, surplus cash, shareholder loans, debt, guarantees and contingent liabilities. A business may have strong EBITDA but still require a substantial deduction for debt or additional working capital.

Forecast risk is another common fault line. Ask whether projected growth is supported by signed contracts, historic conversion rates, pricing changes or assumptions that have not yet been tested. Comparable companies and transactions should match the business in size, sector, margins and risk. A large listed company is rarely a reliable comparison for a small private company without careful adjustment.

Finally, compare the valuation date, discount rate, terminal growth rate and any discount for control or marketability. Consider how the proposed route affects a minority shareholder. Challenge the evidence in a structured schedule rather than arguing that one final figure “feels” too high or low. That approach gives shareholders, solicitors and experts clear points to resolve and strengthens the expert evidence.

Understand likely costs and timing

In a UK SME matter, a straightforward standalone share valuation may cost a few thousand pounds, often around £2,500 plus VAT as an initial guide. A more involved buyout valuation may fall within a wider range, such as £3,500 to £7,500 plus VAT.

Contested work costs more. Expert meetings, rebuttal reports, oral evidence, legal proceedings and court involvement can take the total into the £4,000 to £12,000-plus range, depending on the records, disputed assumptions and procedural requirements. These are broad market indications, not a fixed quote or promise.

The timetable can also extend when information is incomplete or the parties cannot agree an expert. An early scope review should confirm the documents required, the date to be used, assumptions to test, expected deliverables, timetable and fee basis.

Ask for that scope before work begins. It helps you assess whether a full expert report is necessary immediately, or whether an initial review could identify the main valuation issues and support an early commercial settlement.

Frequently Asked Questions

The valuation basis, including fair value, is only one part of a shareholder buyout. The legal route, evidence, funding arrangements and tax treatment can all affect the final outcome. These are the questions shareholders and directors commonly ask once the main valuation issues are clear.

Does a fair value share buyout create a tax liability?

Possibly. A shareholder who sells shares may face Capital Gains Tax on the gain, subject to available reliefs and the individual’s circumstances. The company or purchasing shareholder may also need to consider whether the payment structure creates employment-related or distribution issues.

A fair market value figure doesn’t calculate the seller’s final tax bill. The market value used for the shares is separate from the seller’s tax calculation. Obtain tax advice before agreeing the price, particularly where the transaction involves deferred consideration, loan notes, an earn-out or a management buyout. A price that looks acceptable before tax may produce a different commercial result after tax.

Can the company afford to buy out the shareholder?

A fair value figure doesn’t confirm that the company can fund the purchase. The business may need to use surplus cash, arrange bank finance, make staged payments or rely on another shareholder to buy the shares personally. This may include a minority shareholder selling to the company or another investor.

Before agreeing terms, prepare a cash flow forecast that includes the purchase price, professional fees, tax, debt repayments and working capital requirements. A buyout that leaves the company unable to pay staff, suppliers or lenders is not a workable solution. Funding capacity should be tested alongside the valuation, not after the price has been agreed.

What happens if a shareholder refuses to provide financial records?

The valuation can still proceed, but missing information increases uncertainty and may affect the expert’s conclusions. The valuer may use statutory accounts, bank information, management accounts, customer contracts and other documents that can be verified independently.

If relevant records are being withheld, raise the issue through the agreed dispute process or legal representatives. In court proceedings, disclosure obligations may apply. Keep a schedule of requested documents, dates and responses. It helps establish which assumptions arise from evidence and which arise because information was unavailable.

Can future growth be included in the share valuation?

Yes, where the evidence supports it. A company may be valued using maintainable earnings, forecast cash flows, recurring revenue, signed contracts or other indicators of future performance. A discounted cash flow analysis may also be appropriate. Forecast growth must still be tested against historic results, customer retention, pipeline quality, margins and funding requirements.

The valuer should distinguish between value that existed at the date of valuation and value created by later events. This is particularly important where the dispute itself affected trading performance. A UK business valuations guide explains how earnings, cash flow, DCF and market comparables can be assessed in the wider valuation analysis.

Is an independent valuation automatically binding?

No. An independent expert’s report is an expert opinion unless the parties’ agreement gives the valuer decision-making authority. A shareholders agreement may require expert determination, in which case the expert’s decision can have contractual effect within the scope of the appointment.

A court can also consider expert evidence without accepting every conclusion. Check the appointment terms carefully. They should identify the valuation basis, information available, date of valuation, procedure for questions and whether the expert is deciding the figure or reporting an opinion.

Should you instruct a valuer before speaking to a solicitor?

The legal and financial work should be coordinated. A solicitor can confirm the dispute route, relevant contractual provisions and questions the valuation must answer. A valuer can then assess the financial evidence without building a report on incorrect legal instructions.

Don’t commission a generic business valuation if the report will be used in an unfair prejudice matter under section 994. Agree the scope first, including the intended use, date of valuation and treatment of discounts. For help reviewing the valuation requirements, Talk to Consult EFC – an ICAEW-regulated Corporate Finance Advisory firm today.

Conclusion

The headline figure only matters when it answers the right valuation question. Market value may suit some circumstances, but the correct basis depends on the governing documents, legal route, valuation date and financial evidence.

An independent report should test those points before negotiations become entrenched. It can distinguish genuine valuation differences from unsupported discounts and give both sides a documented basis for discussion. Consult EFC provides expert share valuation support for SMEs handling a shareholder dispute and needing a defensible figure, not a rough estimate.

Talk to Consult EFC – an ICAEW-regulated Corporate Finance Advisory firm today.

Kish Patel ACA, ICAEW · Founder, Consult EFC

Over 12 years across Big Four audit, Investment Banking, and corporate advisory. Kish works with SaaS founders, tech companies, and ambitious UK SMEs from £1M to £50M in revenue on fundraising, valuations, exit planning, and financial strategy. ICAEW regulated. Big Four trained. Based in London.