Share settlement in Pvt Co.
This query is : Resolved
31 March 2010
How is the settlement done if one of the shareholder wants to quit from the private company & demands his share..?
Can he expect to get back what he has paid / subscribed as a share-holder
Can he expect to get back what he has paid / subscribed as a share-holder
31 March 2010
As the company is a private company --- shares are not freely transferable.
So with the permission of board a member can transfer his shares to another member within the company and can received the value of his shares. Well power is with the board of directors to decide the value of transfer.
Regards
So with the permission of board a member can transfer his shares to another member within the company and can received the value of his shares. Well power is with the board of directors to decide the value of transfer.
Regards
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31 March 2010
Procedure for transfer of shares of private company
Generally articles contain the detailed provisions as regards the procedure for transfer of shares. Usually following steps shall be followed by a private company to give effect to the transfer of shares:—
(i) Transferor should give a notice in writing for his intention to transfer his share to the company.
(ii) The company in turn should notify to other members as regards the availability of shares and the price at which such share would be available to them.
(iii) Such price is generally determined by the directors or the auditors of the company.
(iv) The company should also intimate to the members, the time limit within which they should communicate their option to purchase shares on transfer.
If none of the members comes forward to purchase shares then the shares can be transferred to an outsider and the company will have no option, other than to accept the transfer.
It is to be noted that any transfer of shares to an outsider without complying with the procedure as specified in the articles for effecting transfer of shares will not be operative against the company. Even in the case where the procedure prescribed by the articles was not followed and such failure was not due to any fault on the part of the selling shareholder, the transfer to an outsider was held not to be effective.
Valuation for consideration for transfer of shares of a private company
Usually, Articles of a private company provides that the shares are to be sold under pre-emption clause at a fair price determined by directors or the company's auditors. It may also be provided that the fair price would be certified by the company's auditors.
If the pre-emption clause requires that the shares are required to be offered to other members at a price certified by the directors or auditors, the Courts are not in a position to enquire into the correctness of valuation, unless there is evidence that valuation was not correctly made. If the person who made the valuation has acted negligently and failed to take into account all the necessary factors for arriving at the value of shares, in such case the transferor may sue for damages to the person who made the valuation for difference between the value of the share, as computed by the valuer, and the real value of shares.
The Company Law Board/Tribunal ordinarily do not interfere with the valuation made by experts. Therefore, if valuation is challenged then there must be sufficient evidence in support to show that valuation is improper.
Best Regards
Generally articles contain the detailed provisions as regards the procedure for transfer of shares. Usually following steps shall be followed by a private company to give effect to the transfer of shares:—
(i) Transferor should give a notice in writing for his intention to transfer his share to the company.
(ii) The company in turn should notify to other members as regards the availability of shares and the price at which such share would be available to them.
(iii) Such price is generally determined by the directors or the auditors of the company.
(iv) The company should also intimate to the members, the time limit within which they should communicate their option to purchase shares on transfer.
If none of the members comes forward to purchase shares then the shares can be transferred to an outsider and the company will have no option, other than to accept the transfer.
It is to be noted that any transfer of shares to an outsider without complying with the procedure as specified in the articles for effecting transfer of shares will not be operative against the company. Even in the case where the procedure prescribed by the articles was not followed and such failure was not due to any fault on the part of the selling shareholder, the transfer to an outsider was held not to be effective.
Valuation for consideration for transfer of shares of a private company
Usually, Articles of a private company provides that the shares are to be sold under pre-emption clause at a fair price determined by directors or the company's auditors. It may also be provided that the fair price would be certified by the company's auditors.
If the pre-emption clause requires that the shares are required to be offered to other members at a price certified by the directors or auditors, the Courts are not in a position to enquire into the correctness of valuation, unless there is evidence that valuation was not correctly made. If the person who made the valuation has acted negligently and failed to take into account all the necessary factors for arriving at the value of shares, in such case the transferor may sue for damages to the person who made the valuation for difference between the value of the share, as computed by the valuer, and the real value of shares.
The Company Law Board/Tribunal ordinarily do not interfere with the valuation made by experts. Therefore, if valuation is challenged then there must be sufficient evidence in support to show that valuation is improper.
Best Regards
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31 March 2010
Wow great & detailed answer..Also could you pl explain the process / method for arriving the valuation of the shares..(assuming its a loss making company)
25 July 2025
Great question! When valuing shares in a loss-making private company, the process can be a bit tricky because traditional valuation methods that focus on profits don’t apply directly. Here’s an overview of common approaches and considerations:
How to Value Shares in a Loss-Making Private Company
Net Asset Value (NAV) Method
This is one of the most straightforward methods for a loss-making company.
Calculate the Net Asset Value = Total Assets (at fair value) – Total Liabilities.
Divide NAV by the number of outstanding shares to get the value per share.
Since the company is loss-making, NAV reflects the book value or liquidation value more than earning potential.
Discounted Cash Flow (DCF) Method
Usually used for companies with positive cash flows or expected turnaround.
Project future cash flows (may be negative initially for a loss-making firm), then discount back to present value.
For a loss-making firm, DCF may give a very low or zero valuation unless turnaround prospects are strong.
Earnings Multiple / Price-to-Earnings (P/E) Method
Not applicable directly here because earnings are negative.
Comparable Company Method
Compare valuation multiples (like P/B ratio, P/S ratio) of similar companies in the industry.
Adjust for the fact that your company is loss-making, which may reduce the multiples applied.
Adjusted Book Value or Liquidation Value
Especially relevant if the company might be wound up or if shares are being sold under distress.
May involve discounting the net asset value further to reflect forced sale.
Practical considerations:
Articles of Association:
The company’s Articles often specify the valuation method or who appoints the valuers (directors, auditors, independent valuer). Follow the stipulated procedure.
Valuer Appointment:
Usually, a valuer (company auditor, independent chartered accountant, or valuation expert) is appointed to assess value based on the agreed method.
Market Conditions & Negotiation:
In a loss-making scenario, the valuation often involves negotiation between buyer and seller.
Discount for Lack of Marketability:
Since shares in a private company are not freely traded, a discount (10-30%) is typically applied to reflect this illiquidity.
Summary of steps:
Confirm valuation method as per Articles of Association or shareholders agreement.
Appoint a qualified valuer (auditor, CA, or independent expert).
Valuer calculates NAV and/or uses other appropriate method.
Apply any discount (illiquidity, market conditions).
Board or auditor certifies the valuation.
Communicate valuation and offer price to existing shareholders (pre-emption rights) if applicable.
How to Value Shares in a Loss-Making Private Company
Net Asset Value (NAV) Method
This is one of the most straightforward methods for a loss-making company.
Calculate the Net Asset Value = Total Assets (at fair value) – Total Liabilities.
Divide NAV by the number of outstanding shares to get the value per share.
Since the company is loss-making, NAV reflects the book value or liquidation value more than earning potential.
Discounted Cash Flow (DCF) Method
Usually used for companies with positive cash flows or expected turnaround.
Project future cash flows (may be negative initially for a loss-making firm), then discount back to present value.
For a loss-making firm, DCF may give a very low or zero valuation unless turnaround prospects are strong.
Earnings Multiple / Price-to-Earnings (P/E) Method
Not applicable directly here because earnings are negative.
Comparable Company Method
Compare valuation multiples (like P/B ratio, P/S ratio) of similar companies in the industry.
Adjust for the fact that your company is loss-making, which may reduce the multiples applied.
Adjusted Book Value or Liquidation Value
Especially relevant if the company might be wound up or if shares are being sold under distress.
May involve discounting the net asset value further to reflect forced sale.
Practical considerations:
Articles of Association:
The company’s Articles often specify the valuation method or who appoints the valuers (directors, auditors, independent valuer). Follow the stipulated procedure.
Valuer Appointment:
Usually, a valuer (company auditor, independent chartered accountant, or valuation expert) is appointed to assess value based on the agreed method.
Market Conditions & Negotiation:
In a loss-making scenario, the valuation often involves negotiation between buyer and seller.
Discount for Lack of Marketability:
Since shares in a private company are not freely traded, a discount (10-30%) is typically applied to reflect this illiquidity.
Summary of steps:
Confirm valuation method as per Articles of Association or shareholders agreement.
Appoint a qualified valuer (auditor, CA, or independent expert).
Valuer calculates NAV and/or uses other appropriate method.
Apply any discount (illiquidity, market conditions).
Board or auditor certifies the valuation.
Communicate valuation and offer price to existing shareholders (pre-emption rights) if applicable.
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