Market Value, Equitable Value and Fair Value are three concepts that frequently arise in contentious share valuations. They are also three of the most commonly misunderstood valuation terms.
Although they are sometimes used interchangeably in correspondence, reports, and even legal documents, they represent distinct valuation bases. Confusing them can lead to flawed instructions, disputed expert evidence, and outcomes that do not reflect the intention of the parties or the Court.
This article explains what Market Value, Equitable Value and Fair Value actually mean, how they differ, and why selecting the correct valuation basis is critical.
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What Is a Valuation Basis and Why Does It Matter?
A valuation basis sets out the fundamental assumptions on which a valuation rests.
It answers questions such as:
- Who are the assumed parties to the transaction?
- Is the transaction hypothetical or between identified individuals?
- Is the asset exposed to the open market or transferred privately?
- Are any advantages specific to certain parties taken into account?
No valuation can be prepared without first establishing its basis. Different bases answer different questions. Applying the wrong basis means answering the wrong question.
In contentious matters, particularly shareholder disputes and Family Court proceedings, the most commonly encountered valuation bases are Market Value and Equitable Value. The term Fair Value also appears regularly, although its meaning depends heavily on context.
What Is Market Value?
Market Value is defined by International Valuation Standards as:
“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
In simple terms, Market Value represents the best price reasonably obtainable in the open market.
Key features of Market Value include:
- A hypothetical transaction
- Unrelated, willing parties
- Proper marketing
- No special value to a particular buyer or seller
- No hindsight beyond the valuation date
Market Value reflects the asset’s highest and best use as perceived by market participants. It excludes any element of value that arises purely because of the identity or circumstances of a specific owner or purchaser.
What Is Equitable Value?
Equitable Value is defined by International Valuation Standards as:
“The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.”
Unlike Market Value, Equitable Value is not hypothetical. It is concerned with fairness between specific, identified parties.
Until 2017, International Valuation Standards used the term Fair Value for this concept. The term Equitable Value was introduced to avoid the confusion referred to below.
Equitable Value allows the valuer to consider advantages or disadvantages that arise uniquely for the parties involved, even if those advantages would not be available in the open market.
What Is the Difference Between Market Value and Equitable Value?
The key distinction lies in the identification of specific parties whose interests must be balanced.
Market Value is determined by the market as a whole and fairness plays no part.
Equitable Value is fair as between the identified parties involved.
Market Value requires the valuer to ignore any attributes of an asset that are valuable only to a specific buyer or seller. Equitable Value requires the valuer to consider those attributes if they affect the balance of interests between the identified parties.
Example
Consider a company owned by two shareholders holding 49 percent each and a third shareholder holding 2 percent.
- The Market Value of the 2 percent shareholding is likely to be discounted, as it represents a non-controlling interest.
- However, to either 49 percent shareholder, acquiring that 2 percent stake would convert their holding into a controlling interest.
The value of the 2 percent shareholding to each of those shareholders may therefore exceed its Market Value. That additional value is captured under Equitable Value, not Market Value.
Where Does Fair Value Fit In?
Fair Value appears in two distinct contexts, which is where much of the confusion arises.
Fair Value in Accounting Standards
In accounting, Fair Value is generally aligned with Market Value. For example, 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.”
This definition is conceptually consistent with Market Value under International Valuation Standards.
Fair Value in Legal Documents and Court Directions
Fair Value also appears in Articles of Association, shareholders’ agreements, and court orders. In these contexts, it may or may not be defined clearly.
Sometimes case law or judicial direction provides guidance on what is meant by “fair”. For example, the Court may direct that no minority discount be applied where a quasi-partnership exists. In other cases, the term is left undefined, creating scope for dispute.
In some jurisdictions, particularly in North America, the term “fair market value” is used. This generally aligns with Market Value rather than Equitable Value.
Why Does Choosing the Correct Valuation Basis Matter?
Every valuation answers a specific question.
If you ask the wrong question, you will get the wrong answer.
- If you want to know what price might be achieved in a hypothetical open-market sale, you need a Market Value valuation.
- If you want to know what price would be fair between specific parties with particular interests, you need an Equitable Value valuation.
Problems arise when instructions are unclear, inconsistent, or based on terminology that is not properly defined.
When drafting legal documents that require a valuation, careful thought should be given to the valuation basis selected. Specialist valuation advice at this stage can prevent costly disputes later.
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Frequently Asked Questions
Are Market Value and Fair Value the same?
Sometimes, but not always. In accounting standards, Fair Value generally aligns with Market Value. In legal documents or court proceedings, Fair Value may mean something different depending on how it is defined. For contentious share valuation purposes undertaken in compliance with International Valuation Standards, no, they are not.
Is Equitable Value higher than Market Value?
Not necessarily. Equitable Value may be higher or lower than Market Value depending on the circumstances and the relative advantages or disadvantages to the identified parties.
Can the Court choose a different basis from the valuer?
Yes. The Court may consider valuation evidence prepared on a particular basis and then adjust its conclusions to achieve a fair outcome. This does not change the underlying valuation basis but affects how the evidence is used.
Why do valuation disputes often arise from terminology?
Because valuation terms are sometimes used loosely or interchangeably without proper definition. Small differences in wording can lead to materially different outcomes.
Should valuation bases be defined in Articles of Association, shareholder agreements, and other legal documents?
Yes. Clear definition of valuation bases in governing documents reduces ambiguity and significantly lowers the risk of dispute.
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