The standard frames the valuation
A valuation conclusion cannot be assessed without knowing its standard of value. The standard defines the assumptions about the buyer, seller, transaction, market, and rights being valued.
International Valuation Standards recognise several bases of value, including market value, fair value, and investment value.
In shareholder disputes, the governing statute, case law, shareholdersʼ agreement, or buy-sell agreement usually determines which standard applies. The valuer should identify that standard at the outset rather than assume that “fair value” and “fair market value” are interchangeable.
Fair market value
Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion to buy or sell, both having reasonable knowledge of the relevant facts.
It is commonly used in tax, estate, and certain transaction-related contexts. Under this standard, the valuation may consider whether the interest being valued has control characteristics or can be readily sold in an open market.
Where relevant, fair market value may reflect:
A discount for lack of control, where a minority holder cannot direct strategy, management, dividends, or major corporate decisions.
A discount for lack of marketability, where the interest cannot be readily converted into cash.
Other adjustments supported by the facts, legal framework, and valuation evidence.
Fair value
Fair value has different meanings depending on the framework. In financial reporting, IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In shareholder disputes, however, “fair value” is often a statutory or judicial standard. Its meaning is determined by the governing law and the facts of the case, rather than by a generic market definition.
In many jurisdictions, fair value in a shareholder buyout or dissenting-shareholder context is intended to protect the exiting or dissenting shareholder from receiving a value reduced by shareholder-level discounts. Accordingly, courts may exclude or limit discounts for lack of control or lack of marketability.
Why the difference matters
The practical effect can be significant. Under fair market value, a minority, non-marketable interest may be valued at less than its proportionate share of enterprise value because the holder lacks control and faces difficulty selling the interest. Under a fair-value standard, the same interest may be valued at its proportionate share of the companyʼs value, with discounts excluded or restricted.
Consideration | Fair market value | Fair value in shareholder disputes |
Typical source | Tax, estate, and transactional frameworks | Statute, case law, or shareholders’ agreement |
Hypothetical parties | Willing buyer and willing seller, neither compelled |
Determined by the governing legal framework |
Treatment of discounts | May apply discounts for lack of control or marketability | Often excluded or limited, depending on jurisdiction |
Economic focus | Price achievable in an open market | Fairness to the shareholder in the dispute context |
Key risk |
Applying the wrong discount framework | Assuming discounts are excluded without legal support |
The table is illustrative. The treatment of discounts depends on the governing law, facts, and the precise wording of the applicable statute or agreement.
1. Identify the source of the standard
The first step is to identify where the valuation standard comes from. It may arise from:
A statute governing dissenting shareholders or corporate dissolution.
Case law interpreting the applicable statute.
A shareholdersʼ agreement or buy-sell agreement.
A court order or tribunal direction.
A tax, regulatory, or financial reporting framework.
The valuer should not select a standard based solely on preference or convenience. The legal framework and instructions from counsel should determine the applicable basis of value.
2. Do not assume discounts follow automatically
Discounts should be applied only where they are consistent with the applicable standard and supported by evidence. A discount for lack of control and a discount for lack of marketability address different economic characteristics and should not be treated as a single combined adjustment.
A discount for lack of control concerns the holderʼs ability to influence decisions. A discount for lack of marketability concerns the ability to sell the interest quickly and at low transaction cost. Applying both without analysing the interestʼs actual rights, restrictions, and market context can result in double counting.
3. Consider the purpose of the remedy
The purpose of the dispute remedy can influence the appropriate treatment of discounts. In appraisal or buyout proceedings, fair value may be intended to compensate a shareholder for the interest taken from them, rather than to replicate the price that shareholder could obtain in a hypothetical open-market sale.
This is one reason why fair value may exclude shareholder-level discounts: applying them could reduce the exiting shareholderʼs recovery below their proportionate share of the companyʼs value.
4. Explain the conclusion transparently
A valuation report should clearly state:
The applicable standard of value and its source.
The valuation date.
The interest being valued and its rights.
Whether discounts or premiums have been applied.
The evidence and reasoning supporting any adjustment.
The methods, assumptions, and limitations of the analysis.
This transparency allows legal advisers, courts, and opposing experts to understand not only the value conclusion, but also the framework from which it was derived.
Closing perspective
Fair value and fair market value are different valuation frameworks, not alternative labels for the same conclusion. The applicable standard determines the hypothetical transaction, the treatment of shareholder rights, and whether discounts are relevant.
In disputes, identifying the standard of value is therefore a threshold issue. It should be resolved before selecting methods, analysing discounts, or expressing a value conclusion.