Share valuation

Produced by Tolley in association with Andrew Rainford

The following Employment Tax guidance note Produced by Tolley in association with Andrew Rainford provides comprehensive and up to date tax information covering:

  • Share valuation
  • Open market value
  • Potential valuation situations
  • Underlying legislation
  • Quoted companies
  • Private companies
  • Recent transactions
  • Maintainable earnings
  • Dividend yield
  • Net asset value
  • More...

Share valuation

This guidance note provides an overview of the valuation of shares in the context of employee reward.

It is strongly recommended that anybody wishing to obtain a formal valuation should get advice from an experienced practitioner.

Open market value

In order to determine the value of a company’s shares in connection with a transaction involving employees, it is usually necessary to determine the price that a willing buyer would pay a willing seller, assuming that both of them have full knowledge of all information that is publicly available at the time of the sale.

One factor that must be taken into account is the size of shareholding. It is generally recognised and understood that where somebody has a very small uninfluential shareholding that this is worth considerably less per share than a controlling shareholding.

As an example, while some shares that form part of a 100% shareholding will clearly be worth the appropriate percentage of the whole value of the company, if an employee is offered 0.01% of the company’s shares, they will not have any significant voting power. They may also be prevented from selling shares other than in limited circumstances and will be obliged to follow the whims of the majority shareholder. In such situations, it would be usual to negotiate a very substantial discount, ie more than 50%.

Potential valuation situations

Valuations may be required in several circumstances, some of which are detailed below. When somebody acquires shares, there is likely to be a tax liability, which means that the value of the shares is of relevance. Similarly, the exercise of an option creates a potential tax charge, which may mean that a valuation is required.

When restrictions on the shares are lifted, this may also give rise to a tax charge and some kind of

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