When articles force a shareholder to sell, the price is whatever the valuation clause says, not a figure set by law. Most clauses use either “fair value”, usually defined as a proportion of the value of the whole company with no discount for a minority stake, or “market value”, which normally values the holding itself and so can carry a large minority discount. The definition, the valuation date and whether the valuer acts as an expert or an arbitrator decide what the seller receives.
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Where do share valuation clauses come from?
Section 544 of the Companies Act 2006 says shares are transferable in accordance with the company’s articles, so any obligation to sell, and any price for that sale, must be written into the articles or a contract. The model articles for private companies contain no compulsory transfer or price provisions; their only control on transfers is the directors’ power to refuse registration in article 26(5).
Price clauses therefore sit in bespoke articles, which bind the company and every member as if each had covenanted to observe them (section 33), or in a shareholders’ agreement, which binds only those who sign it. They are typically used for:
- compulsory transfers when an employee shareholder leaves, covered in good leaver and bad leaver provisions;
- transfers on death, bankruptcy or a change of control of a corporate shareholder;
- pre emption on a voluntary sale, where the seller must first offer shares to the other members at a price agreed or set by a valuer; and
- deadlock and buy out provisions between joint venture partners.
What is the difference between fair value and market value?
Neither phrase has a fixed meaning in company law; each takes whatever meaning the articles give it. In practice:
- Fair value is usually defined as the value of the whole issued share capital as between a willing buyer and a willing seller, divided pro rata among the shares, with no discount for the size of the holding or for transfer restrictions.
- Market value is usually defined as the price the particular holding would fetch on a sale between a willing buyer and willing seller, which brings in its size, its lack of control and the restrictions in the articles.
Tax uses its own definition. For capital gains, market value is the price the assets might reasonably be expected to fetch on a sale in the open market (section 272 of the Taxation of Chargeable Gains Act 1992), and for unquoted shares the buyer is assumed to have all the information a prudent buyer would reasonably require (section 273). HMRC’s Shares and Assets Valuation Manual at SVM113040 explains that the hypothetical buyer steps into the seller’s shoes subject to the restrictions in the articles, so the open market price is not necessarily the “fair value” the articles refer to. HMRC’s Employment Related Securities Manual at ERSM30320 makes the same point the other way: a fair value offered on compulsory repurchase may be equal to, more than or less than market value.
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How large can a minority discount be?
Large. HMRC’s Capital Gains Manual at CG59562 says the size of the shareholding can be critical to the value per share, giving the example that if a 75% holding is worth £100 a share, a 10% holding in the same company may be worth only £20 a share. SVM113030 adds that court decisions on particular discounts for minority holdings or unmarketability are not binding law, because each turns on its own evidence.
So the single most important drafting choice is whether the valuer values the shares as a proportion of the whole company or as the holding actually being sold. If the clause is silent, the parties are likely to argue about it, and the valuer will have to decide.
Who decides the price, and can the decision be challenged?
Most clauses let the parties agree a price within a short period, failing which an independent valuer, usually a chartered accountant, determines it. The clause should say whether the valuer acts as an expert or as an arbitrator, because the routes of challenge are very different.
- Arbitrator. The Arbitration Act 1996 applies to an agreement to submit disputes to arbitration (section 6). In England, Wales and Northern Ireland, an award can be challenged for serious irregularity under section 68 and, unless the parties have agreed otherwise, appealed on a point of law with the agreement of the parties or leave of the court under section 69. Any application must be brought within 28 days (section 70).
- Expert. Clauses that appoint the valuer as an expert and not an arbitrator are designed to keep the Act out. The clause itself usually makes the decision final and binding except for fraud or manifest error, which leaves a much narrower basis for challenge.
Expert determination is quicker and cheaper, which is why most articles use it, but it means the drafting of the valuation instructions carries most of the protection.
What should a well drafted clause specify?
- The basis. Pro rata share of the whole company, or value of the holding; going concern or break up.
- The valuation date. The date of the transfer event, the date a transfer notice is given or deemed given, or the date of the valuation.
- Assumptions. Whether to ignore the transfer event itself, such as a key person leaving, and whether to assume the restrictions in the articles do not apply.
- Information. A duty on the company to give the valuer the accounts, management information and forecasts it needs.
- Appointment. Who appoints the valuer if the parties cannot agree, and by when.
- Costs. Who pays, often the company or the seller depending on how the valuation compares with any price offered.
- Deadlines. When the valuer must report and how long buyers then have to accept.
How do the tax rules interact with the contractual price?
The contractual price is the actual consideration, but tax may substitute market value. Section 17 of the 1992 Act deems a disposal to be at market value where it is not a bargain at arm’s length, and section 18 treats transactions between connected persons as not at arm’s length. A compulsory sale between family members at a formula price may therefore be taxed at a different figure. HMRC’s approach to valuations for gains is covered in CGT valuations.
For employee shareholders, a clause that could make them sell for less than market value can make the shares restricted securities for income tax (section 423 of the Income Tax (Earnings and Pensions) Act 2003, explained at ERSM30320). If the company itself buys the shares, the purchase must follow the share buyback rules; see company share buyback.
What if the clause produces an unfair result?
A shareholder can still petition under section 994 if the company’s affairs are conducted in a way that is unfairly prejudicial to their interests. If the petition succeeds, section 996 lets the court make such order as it thinks fit, including an order for other members or the company to buy the petitioner’s shares, so the price in a court ordered buy out is set by the court’s order. A valuation clause reduces disputes but does not remove that route; see protection for minority shareholders.
How does the choice of wording change the price?
Illustration only. A company is valued at £2 million as a whole. A director holding 10% leaves and must sell under the articles.
| Clause wording | Basis | Price |
|---|---|---|
| Fair value, pro rata, no discount | 10% of £2 million | £200,000 |
| Market value of the holding, assumed 40% minority discount | £200,000 less 40% | £120,000 |
The difference comes entirely from the definition, not the valuation of the company.
What mistakes come up most often?
- Undefined terms. “Fair value” with no definition invites a dispute about discounts.
- No valuation date. In a rising or falling business, weeks can make a large difference.
- Expert or arbitrator left unclear. This leads to argument about whether the Arbitration Act applies.
- Assuming the tax value follows the contract. Connected party sales may be taxed at market value.
- Clauses in an agreement only. A new shareholder who never signed the agreement is not bound by it.
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Related Accountapedia entries
- Valuing private company shares for inheritance tax
- What happens to shares when a shareholder goes bankrupt
- What happens to company shares on divorce
- Transferring shares in a private company
- Drag along and tag along rights
Sources
- legislation.gov.uk: Act 2006 c. 46, section 544
- legislation.gov.uk: SI 2008/3229, schedule 1
- legislation.gov.uk: Act 2006 c. 46, section 33
- legislation.gov.uk: Act 1992 c. 12, section 272
- legislation.gov.uk: Act 1992 c. 12, section 273
- GOV.UK: Manual page SVM113040
- GOV.UK: Manual page ERSM30320
- GOV.UK: Manual page CG59562
- GOV.UK: Manual page SVM113030
- legislation.gov.uk: Act 1996 c. 23, section 6
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.