Area of Law: Business Law
Answer # 0252
Determining price of sharesRegion: Ontario Answer # 0252
Before the shares of a corporation are bought or sold (transferred), the price of the shares will have to be determined. How the price is determined depends on whether they are shares of a private or a public corporation.
Private corporation share price
The price of shares for privately held corporations is determined by the shareholders. There is no one formula for determining the price of shares. A formula to determine share value is often contained in a shareholders agreement. The following are four common evaluation methods used.
- Buy-sell provisions. A buy-sell provision, often referred to as a shotgun clause, provides that if one shareholder no longer wishes to be in business with the other shareholders, he or she will offer to buy the shares of the other shareholders, or sell his or her shares to them, for a set price. The other shareholders then have the right to either accept the offer, or they can force the offering shareholder to buy or sell their shares at the price offered.
- A multiple formula. The share price could also be determined by a formula based on a multiple of company revenue or profits, such as a price based on between 3-5 years of profits.
- Price to Earnings of public corporation. Another method used to determine price is to find a public corporation that is similar in size to the privately held corporation and which sells similar products or services, and determine it’s ‘price-to-earnings’ ratio to estimate the comparative value for the private corporation.
- Recent comparable. A share price may also be based on the share price paid on the most recent share transfer between shareholders, or share issuance from the corporation.
Public corporation share price
The price of shares of a public corporation is determined in the stock market and openly available to the public.
Popular stock exchanges include the:
- TSX – Toronto Stock Exchange
- MX – Montreal Exchange
- CSE – Canadian Securities Exchange
- NYSE – New York Stock Exchange
When a company first goes public and begins trading on a stock exchange, its share price is determined by supply and demand for the shares in the market. A high demand, perhaps because there is positive news about the company’s future earnings, will usually result in the price increasing. However, negative news, for example, that a company’s revenues have dropped, could result in the sale of the stock which can then lower the share price.
Share prices may also be affected by other factors, such as:
- the introduction of a new product
- recall of a product
- introduction of new laws
- the change of corporate management
- employee downsizing
- news of a merger or a takeover
- overall change in the economy
- change in interest rates
- change in inflation rates
- new government
- value of the Canadian dollar
- global events.
If you are transferring shares in a private corporation and no formula or price has been put in place in advance of the transfer, it is advisable to consult a lawyer, a business evaluator or an accountant for help.
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