How Is Unlisted Share Value Determined During Corporate Exit?
Introduction
When a stockholder exits a corporation, the parties may disagree on the amount payable for the shares. The disagreement commonly arises when the shares are not listed on a stock exchange and therefore have no readily observable market price.
Philippine law generally resolves the issue through the appraisal right. The stockholder must first establish that the corporate action falls within a legally recognized instance of appraisal. The parties may then negotiate the fair value of the shares, subject to statutory procedures when no agreement is reached.
For unlisted shares, valuation ordinarily requires an examination of the corporation’s financial condition, assets, earnings, liabilities, business prospects, and other evidence relevant to value. No single accounting method automatically controls every appraisal dispute.
What Is the Appraisal Right?
The appraisal right allows a dissenting stockholder to demand payment of the fair value of shares when the corporation undertakes certain fundamental transactions. Under the Revised Corporation Code of the Philippines, the right may arise from specified amendments to the articles of incorporation, the disposition of all or substantially all corporate assets, or a merger or consolidation.
In Cua, Jr., et al. v. Tan, et al., G.R. Nos. 181455-56, 2009, the Supreme Court recognized that a transaction involving substantially all of a corporation’s assets may qualify as an appraisal event. The Court also explained that a stockholder who has an available appraisal remedy generally cannot use a derivative action to challenge the same corporate act without satisfying the applicable requirements.
What Value Must the Corporation Pay?
The statutory measure is the fair value of the shares as of the day before the vote was taken. Any appreciation or depreciation arising in anticipation of the proposed corporate action must be excluded.
This valuation date is distinct from the date on which the corporation eventually pays the stockholder. A later increase or decrease in the company’s value does not necessarily change the statutory valuation date.
Under Section 81 of the Revised Corporation Code, the dissenting stockholder must make a written demand for payment within thirty days from the date of the vote. Failure to make the demand within that period waives the appraisal right.
What Happens When the Parties Disagree?
If the corporate action is implemented, the corporation must pay the stockholder upon surrender of the stock certificate or certificates representing the shares. If the stockholder and corporation cannot agree on value within sixty days from approval of the corporate action, the value must be determined by three disinterested appraisers.
| Appraiser | How Selected |
|---|---|
| First appraiser | Chosen by the dissenting stockholder |
| Second appraiser | Chosen by the corporation |
| Third appraiser | Chosen by the first two appraisers |
The majority findings of the appraisers are final under the statute. The corporation must pay the award within thirty days after it is made, subject to the requirement that it have unrestricted retained earnings sufficient to cover the payment.
Why Are Unrestricted Retained Earnings Important?
The appraisal right does not permit a corporation to make a payment that would unlawfully impair its capital. Section 81 therefore provides that no payment may be made to a dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment.
In Turner, et al. v. Lorenzo Shipping Corporation, G.R. No. 157479, 2010, the Supreme Court held that the existence of unrestricted retained earnings is a condition to the stockholder’s cause of action for collection. An action filed before that condition exists is premature, and the later accumulation of retained earnings during the case does not cure the original defect.
Which Accounting Methods May Be Used?
For unlisted shares, valuation professionals may use more than one method and compare the results. The appropriate method depends on the nature of the business, the quality of the financial records, the corporation’s assets, and whether the company is operating, distressed, asset-heavy, or income-producing.
| Method | General Approach | Common Use |
|---|---|---|
| Adjusted book value | Starts with net assets and adjusts assets and liabilities to their present or fair values. | Asset-intensive companies, holding companies, and corporations with substantial real property. |
| Income approach | Estimates value from expected future earnings or cash flows, discounted to present value. | Operating businesses with reliable financial forecasts and continuing income. |
| Market approach | Uses prices or valuation multiples from comparable companies or comparable transactions. | Businesses for which sufficiently similar market data exists. |
| Dividend or earnings capitalization | Capitalizes sustainable dividends or earnings using an appropriate rate. | Companies with stable distributions or predictable earnings. |
These methods are valuation tools rather than automatic statutory formulas. The appraisal must still reflect the fair value required by the Revised Corporation Code and the legally relevant valuation date.
How Should the Valuation Be Supported?
A valuation report should identify the financial information used, explain the assumptions, state the valuation date, and disclose material limitations. The report should ordinarily examine audited financial statements, management accounts, tax records, debt obligations, contingent liabilities, material contracts, corporate assets, and the company’s business prospects.
Where a corporation’s principal value consists of real property or other major assets, the asset values may materially affect the share valuation. SEC Memorandum Circular No. 2, Series of 2014, requires certain public companies, secondary licensees, and specified entities to engage SEC-accredited appraisal companies or professional services organizations for covered asset valuations. For non-public companies involving real property, the circular refers to an appraiser or valuer licensed under Republic Act No. 9646.
SEC Memorandum Circular No. 13, Series of 2013, likewise requires more than one valuation methodology for fairness opinions issued in covered mandatory tender-offer transactions. It also requires the use of relevant and current data and an explanation when the valuation materially differs from market price. These requirements are specifically directed to fairness opinions under the Securities Regulation Code and should not automatically be treated as identical to every appraisal-right proceeding.
What Evidence May Affect the Value of Unlisted Shares?
The following evidence may be relevant:
- Audited financial statements and interim financial reports;
- Adjusted values of land, buildings, equipment, inventory, and investments;
- Outstanding loans, payables, guarantees, tax exposures, and contingent liabilities;
- Historical and projected revenues, earnings, dividends, and cash flows;
- Comparable-company multiples and comparable share transactions;
- Material contracts, licenses, litigation, and business restrictions; and
- Evidence concerning discounts or premiums, when legally and economically justified.
A valuation should not rely solely on the corporation’s book value when the recorded amounts materially differ from current asset values. Conversely, an optimistic forecast should not be accepted without support from historical performance, enforceable contracts, industry conditions, and independently verifiable assumptions.
Can a Stock Sale Agreement Determine the Share Value?
A negotiated sale of shares is generally governed by the parties’ agreement. In Verga, Jr. v. Harbor Star Shipping Services, Inc., G.R. No. 261323, 2024, the Supreme Court held that a contract of sale may be perfected by consent when the parties agree on the shares and the price, even if a later audit is intended to determine or adjust the consideration.
This principle concerns a voluntary sale and should be distinguished from a statutory appraisal proceeding. In an appraisal case, the controlling inquiry remains the fair value required by the Revised Corporation Code as of the legally prescribed date.
Parties may also agree to submit valuation questions to an appraiser. Once a compromise agreement has been approved by a court, its terms generally bind the parties as a final judgment. In Ynson v. Court of Appeals, et al., G.R. No. 117018-19, 2002, the Supreme Court recognized the binding effect of a court-approved compromise, including an agreed provision making an appraiser’s determination final, absent fraud or another legally sufficient ground for relief.
Common Valuation Errors
Several errors frequently produce disputes over unlisted shares:
- Using the corporation’s original subscription price as the present fair value;
- Using book value without adjusting materially undervalued or overvalued assets;
- Including appreciation caused solely by the proposed corporate transaction;
- Ignoring debt, tax liabilities, pending litigation, or other contingent obligations;
- Using unsupported projections or an inappropriate comparison group; and
- Failing to distinguish the valuation date from the date of payment.
A report may also be challenged when the appraiser lacks independence or when the report does not explain how the selected method fits the corporation’s business and available evidence.
Recommended Procedure for a Dissenting Stockholder
- Confirm that the corporate action is one of the statutory instances giving rise to appraisal rights.
- Vote against the proposed corporate action when voting is required.
- Deliver a written demand for payment within thirty days from the vote.
- Request the corporation’s relevant financial and asset information, subject to applicable inspection rules and confidentiality obligations.
- Obtain an independent valuation using methods suited to the corporation’s business and assets.
- Document all valuation assumptions, adjustments, exclusions, and supporting records.
- Observe the sixty-day period for agreement on fair value and, if necessary, participate in the selection of the three appraisers.
- Verify whether the corporation has unrestricted retained earnings before filing a collection action.
Recommended Procedure for the Corporation
The corporation should preserve the minutes, voting records, notices, financial statements, asset records, and written demands relating to the proposed corporate action. It should also provide a reasoned valuation position rather than relying on a bare assertion that the shares have little or no value.
The corporation should select an independent appraiser with appropriate experience and disclose material information needed for a reliable valuation. If the corporation disputes the stockholder’s valuation, its response should identify the specific assumptions, accounting treatments, or comparable transactions that it contests.
Conclusion
Fair value for unlisted corporate shares is determined through a legally controlled process supported by financial and valuation evidence. The usual methods include adjusted book value, income-based valuation, market comparisons, and capitalization of sustainable earnings or dividends, but no method is universally decisive.
The parties should focus on the statutory valuation date, exclude transaction-driven appreciation or depreciation, account for liabilities and asset values, and use independent professionals where appropriate. A dissenting stockholder must also comply strictly with the thirty-day written-demand period and consider the unrestricted-retained-earnings requirement before pursuing collection.
Because the legal result may depend on the type of corporate action, the corporation’s financial condition, the terms of its articles and bylaws, and the evidence available, the valuation process should be reviewed by Philippine corporate counsel and a qualified valuation professional before a demand, appraisal, settlement, or court action is finalized.
About Nicolas and De Vega Law Offices
Nicolas and de Vega Law Offices is a full-service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.
