5.3.4 Valuation of shares

Controversies about issues of valuation exist at all times. One consensus, however, has been reached, that is: valuation is such a complex issue that it is impossible for legislators to predict or set out a uniform formula as the best practice for all cases. In Article 75, two ways to decide the price are provided: one is negotiation between the dissenting shareholders and the company, and the other is judicial judgement. The former is the unavoidable route to the laffer. When the parties fail to reach an agreement on the price by themselves, the court assumes responsibility for calculating a reasonable price. Because the practice of judicial valuation of the dissenter's shares has been newly introduced in China, it is understandable that legislators consider it a daunting task to regulate such an unfamiliar and complicated issue. It is nevertheless inconceivable that legislators have lelt it wholly unregulated. In Article 75 states only that dissenting shareholders should be bought out at a reasonable price. There is no general guidance on the valuation methods, the valuation date, the discount issue, interest, or the court's discretional power in dealing with these matters. I therefore think it is an acceptable idea to first ask the SPC to give guidance and principles through legal interpretations, and publish its reasoning and explanation on valuation issues with representative cases submitted to it, while gaining experience from developed jurisdictions in the meantime. After adequate practice and experience have been gained, valuation mies can be laid down in Article 75. Rome was not built in a day; the same applies to the architecture for such a complicated issue. The following part contains experiences from the US on valuation issues which would be helpful for the Chinese legislators and courts to consider.

As to the valuation methods, the Delaware block method had been dominant for decades. Now the general principle is that the court should use customary and current valuation concepts; techniques generally employed for similar businesses.1 Methods generally used in case law are: net asset value, discounted cash flow (DCF), capitalized earnings (earnings value), comparative corporations, and combination of various methods.2 Legislators do not try to formulate a single method because the choice of valuation method is affected by many elements. In a broad sense, it is affected by features of the specific industry, and specifically, it is also affected by the management policy and situations of the company to be valued. It is impossible to frame a universal line to cover every case. But a general policy to guide the choices still helps.

In addition to providing general guidance on the valuation methods, Article 75 should also clarify how the court can fulfil its function to achieve a reasonable price. Should the court have the ultimate power to decide which methods to use or should it choose between methods proposed by experts from the opposing parties? May the court appoint one or more experts as appraisers to receive evidence and recommend a fair value? If so, who should pay and how should the additional experts' fees be allocated? One cannot expect the Chinese courts to feel as much at ease in dealing with such issues as the Delaware Chancery Court, which is used to exercising its inherent power to decide on issues which are not explicitly laid down in the corporate statute.

Article 75 does not articulate any general position either on the matter of discount. A bright-line rule would therefore be helpful. Dissenting shareholders' interests should not be discounted just because of minority status or lack of marketability.3 The RMBCA and the Principles take a similar approach by focusing on the value of the firm as a whole rather than on the value of specific shares.4

In relation to the issue of interest, there are four concerns, namely the starting date for calculation, the rate, simple or compound, and the discretional power of the court. There is little divergence on the calculation period. The common understanding is: interest should be calculated from the effective date of the corporate action until the date of payment. But there is no consensus on the interest rate and the calculation method.5 One way is to refer to a parameter, such as "an appropriate rate of short-term bank debt for the corporation";6 the other is to grant the court equitable power to decide, as in the Delaware Corporate Statute.7 In my opinion, conferring power on the court to decide based on the facts of specific cases generates more assurance of a fair result. Nonetheless, given the initial stage of this remedy in China, I am in favour of a more detailed and specific regulation of this issue to promote certainty and clarity.