Auditors Pay Price for Incorrect Share Valuation


An ex-director of a company has been awarded substantial damages against the company’s auditors, after he showed that the firm had negligently undervalued his shareholding when he was required to sell the shares back to the company on ceasing to work for it.
When he was an employee, he had purchased the shares at £250 per share. When he left the company, the auditors valued his shares at £128 each. The shares were sold to other shareholders. Later, the director discovered that other employees had been able to dispose of their shares at higher values and the company was sold for a substantial sum.
The man claimed the valuation placed on the shares by the company’s auditors was far below the proper market value at the time and that there were factors which the auditors should have taken into account in their valuation, including likely future outcomes, which they did not.
After hearing expert evidence, the court ruled that the appropriate value to have used was £635 per share, leaving the auditors facing a liability to the former director of £507 per share.
“This case raises two points that are worthy of mention,” says <<CONTACT DETAILS>>. “The first is that had a mechanism setting out how the shares were to be valued when being repurchased been agreed and documented at the outset, there would have been no ground on which to bring an action. Secondly, it is important when giving an expert opinion to be careful to make sure it is both objective and well thought out – it may not be a very good idea for the company’s auditors to carry out the valuation in cases such as this. If you are asked for an expert opinion, it is normally a good idea to decline if the subject is one which is outside your sphere of expertise.”
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Partner Note
McKinlay v Nexia Smith & Williamson Audit Ltd. [2008] All ER 266.

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