For ease I will refer to a fictitious company, Baggins Ltd (“Baggins”). The expert valuer had valued Baggins at approximately £4 million. In my view the valuation of Baggins was reasonable. However, the single critical issue was how the valuer then dealt with the attribution of the value to the share classes.

One shareholder, “Gandalf”, held 100% of the ten A ordinary voting shares and 40% of the 100 ordinary non-voting shares. There were therefore 110 shares in issue, of which ten shares - the A ordinary voting shares - had unfettered and absolute control.

The expert valuer split the company value pro-rata across the 110 shares and therefore valued the holding of Gandalf at 45.45% of the total (based on holding 50 shares out of the total of 110 shares). This valued his shareholding at approximately £1.8 million.

However, my review of the Articles of Baggins confirmed the A Ordinary shares had total control including:

• The right to remove and appoint directors and thus control the company
• The right to place the company into liquidation
• The right to amend the Articles
• The right to dis-apply pre-emption rights

In summary, the A ordinary voting shares had complete power and control and were held by Gandalf. Whilst all shares ranked pari-passu in a distribution of assets in a winding up, the non-voting shares could not force a winding up.

International Valuation Standards recognise the requirement for the valuer to distinguish between the rights of different share classes and to apportion value to each class on a reasonable basis.

In the case of Baggins, it could be argued that 100% of the value should be attributed to the A ordinary voting shares. However, in my opinion it was reasonable to attribute 80% of the value to the A ordinary voting shares and 20% to the non-voting shares. This valued Gandalf’s shareholding at £3.52 million (being 100% of £3.2 million attributed to the A ordinary voting shares and 40% of the £800,000 attributed to the non-voting shares).

The recognition of the nature of the share rights increased the valuation of Gandalf’s shares from £1.8 million to £3.52 million.

The matter was finally settled at mediation following a significantly improved offer to Gandalf.