Private Company Share Valuation in Ontario: Where Agreements Become Ambiguous
Most shareholder agreements refer to “fair market value.”
Very few define what that means in a way that can be applied without disagreement.
The Illusion of Agreement
At the time of drafting, “fair market value” appears sufficient.
It suggests an objective standard. It implies that value can be determined independently and accepted by all parties.
That assumption holds until a transaction is required.
Valuation Is Not Self-Executing
Determining value requires a methodology.
Discounted cash flow, comparable transactions, asset-based approaches — each produces different results depending on assumptions.
Without specifying a method, the agreement defers the most important question to the moment of conflict.
Dispute Without Structure
When parties disagree on value, the agreement must provide a way to resolve that disagreement.
If it does not, the process becomes negotiation.
Without a defined mechanism — such as independent valuators, averaging methods, or binding determinations — the valuation process can stall.
Cost of Ambiguity
Ambiguity increases cost.
Professional fees increase as multiple opinions are obtained. Transactions are delayed. In some cases, disputes escalate beyond the agreement itself.
The cost of resolving the ambiguity often exceeds the cost of having addressed it in advance.
Interaction with Other Clauses
Valuation does not operate in isolation.
It interacts with exit mechanisms, buy-sell provisions, and transfer restrictions. A vague valuation clause can undermine otherwise well-structured provisions.
The Practical Takeaway
Valuation is not a placeholder concept.
It is a mechanism that must function under pressure.
If it is not defined clearly, it becomes the point at which the agreement stops working.