1. Case introduction
In March 2017, Zhang (male) and Li (female) got married. After marriage, Zhang invested 3 million yuan in a high-tech company and held 30% of the company's equity. In July 2021, the two parties filed for divorce due to emotional discord. In the divorce proceedings, Mr. Li advocated the division of the equity value under Mr. Zhang's name, and Mr. Zhang also agreed to compensate Mr. Li, but the two parties disagreed on the amount of compensation. Subsequently, the court organized several negotiations between the two parties on the value of the shares, but all failed. Finally, the court may not decide to entrust an appraisal agency to assess the value of the equity involved in the case.
In September 2021, the two sides determined the evaluation agency through a lottery. After that, the court organized Zhang, Li, and the staff of the assessment agency to conduct an assessment conversation. Under the coordination of the court, the two parties confirmed that July 9, 2021 was used as the assessment date, and Zhang provided the company's balance sheet, income statement and corresponding accounting documents from January 1, 2018 to July 9, 2021. After two months of data collection and evaluation, the appraisal agency finally determined that the value of the company's equity held by Zhang was 3.5 million yuan. In this regard, Li expressed dissatisfaction, believing that the appraisal agency determined the equity value in accordance with the asset base method, that is, the net assets, and could not fully reflect the equity value. The reason is that in September 2019, a well-known venture capital institution gave the company a valuation of 80 million yuan and invested 8 million, accounting for 10% of the company's equity. According to the valuation given by the appraisal agency, the value of Zhang's 30% equity should be 24 million.
After heated debate between the two parties, the court finally ruled that the valuation of the company by the venture capital institution was an expectation of the company's development prospects, and the company's future development was uncertain, and the court dealt with the current value of the company's equity, not the future value. Therefore, it is not improper for the appraisal agency to determine the equity value in accordance with the asset-based method. In the end, the court ruled that the equity belonged to Zhang, and Zhang compensated Li with 1.75 million yuan.
Second, the question is raised
There is no doubt that equity is valuable. We found that in divorce cases, judges are generally reluctant to deal with cases involving the division of the company's equity. This is not because the judge is irresponsible, but because equity as a form of property is too special, and the value of equity is not static, but dynamic. Companies that are profitable this year may suddenly go out of business next year. A startup that has been losing money can also be valued in the billions after a few years of development.
How to determine the value of equity is a very difficult matter for both the judge and the parties. Even asset appraisal agencies are difficult to have an objective standard to evaluate the equity value, and they can only use the method of estimation and estimation to evaluate the equity value under the premise of a bunch of assumptions. Many assessment results are difficult to convince the parties because of the lack of objectivity, or because of problems with the assessment methods or assessment materials on which the assessment report is based. From the perspective of judicial practice, this article will determine the equity value in the process of litigation.
3. Empirical analysis
According to the definition of economics, equity value refers to the market value of the equity of the enterprise, or the exchange value of the equity held by shareholders in the market. There are no clear provisions on how to determine the value of equity, either in law or judicial interpretations. In judicial practice, some local courts have given some guiding opinions based on the needs of adjudication and the consistency of adjudication standards. Such as:
Article 20 of the Reference Opinions on Several Difficult Issues Concerning the Trial of Matrimonial Dispute Cases issued by the Beijing High Court on August 8, 2016 states that:If there is a dispute over the value of the equity to be divided in divorce proceedings, it shall be determined by means of consensus, appraisal, bidding, and reference to the market price. Where the value of equity cannot be determined by appraisal due to reasons such as chaotic financial management, incomplete accounting books, or the refusal of the enterprise operator to provide financial information, the people's court may determine the value of the property on the basis of the financial information filed with the competent administrative authority of the enterprise;Or the value can be assessed by referring to the operating income or profit of local enterprises with similar business scale and income level in the same industry and other means.
The Shanghai High People's Court pointed out in the [2016] No. 3 document "Investigation and Reference of the First Civil Court":If the other party is not a shareholder of the company in the divorce dispute involving the division of the equity of a limited liability company owned in the name of one party, if both parties agree to divide the equity discount and the equity value can be confirmed through negotiation or appraisal, the court may order the non-shareholder to obtain the corresponding equity discountIf the two parties cannot reach an agreement on the value of the equity, and it cannot be determined through evaluation and audit, the people's court shall first solicit the opinions of other shareholders of the company on the shares that the non-shareholder can obtain after the equity split, and the different opinions of the shareholders shall be handled in accordance with Article 16 of the Interpretation (II) on Several Issues Concerning the Application of the Marriage Law of the People's Republic of China;If the other shareholders do not reply within 30 days from the date of receipt of the written notice, they shall also be deemed to have agreed to the transfer, and the court may divide the equity shares.
Article 41 of the Guidelines for the Trial of Family Dispute Cases (Marriage and Family) issued by the Jiangsu High Court on July 18, 2019: When the equity value is appraised, the parties and the company where the equity is located may be ordered to provide the financial and accounting statements and other materials required for the evaluation. If the equity value cannot be assessed due to the company's chaotic management, incomplete accounting books, and the refusal of the company's operator to provide financial information, the balance sheet, profit and loss statement, net asset statement and annual statements published by the company can be obtained from the tax and industrial and commercial departments and other financial information to be submitted to the appraisal agency for assessing the equity value. If the above-mentioned financial information cannot be obtained, the equity value can be determined with reference to the operating income or profit of local companies with similar operating scale and level in the same industry. If a party raises an objection to the equity value determined ex officio, it shall provide financial information that can substantiate its claim.
To sum up, there are mainly the following ways to determine the value of equity in judicial practice:
1. Negotiate to determine the equity value
Negotiated equity value is an efficient, cost-effective, and flexible solution that helps both parties reach an agreement as quickly as possible, reducing disputes and facilitating problem resolution. If the parties agree to use the company's net assets as the basis for determining the value of the equity, the judge may accept such an agreement and make a judgment accordingly.
Article 16 of the original Judicial Interpretation II of the Marriage Law stipulates that "if a people's court hears a divorce case involving the division of the capital contribution in the name of one party to a limited liability company in the joint property of the husband and wife, and the other party is not a shareholder of the company, it shall be handled separately according to the following circumstances: (1) If the husband and wife agree to transfer part or all of the capital contribution to the spouse of the shareholder, and more than half of the shareholders agree and the other shareholders expressly waive the right of preemption, the spouse of the shareholder may become a shareholder of the company;(2) After the husband and wife reach a consensus on matters such as the transfer of the capital contribution share and the transfer, if more than half of the shareholders do not agree to the transfer, but are willing to purchase the capital contribution at the same price, the people's court may divide the property obtained from the transfer of capital contribution. If more than half of the shareholders do not agree to the transfer and are not willing to purchase the capital contribution at the same rate, it shall be deemed that they agree to the transfer, and the spouse of the shareholder may become a shareholder of the company".
However, negotiating the equity value is only an ideal state, and in many cases, the parties cannot agree on the equity value. This requires the judge to reasonably determine the equity value in accordance with the current law and judicial practice.
2. Determine the equity value according to the appraisal report
As mentioned above, the determination of equity value needs to consider many factors, and it is a highly professional technical work, including a large number of financial data analysis and the application of valuation methods. It is difficult to determine the parties and judges by virtue of their professional skills. Article 79 of the Civil Procedure Law provides that "a party may apply to the people's court for an appraisal on the specialized issue of ascertaining facts." Where the parties apply for an appraisal, the parties are to negotiate to determine a qualified appraiser;and where negotiation fails, the people's court is to appoint one. Therefore, in this case, the judge will generally require the party to apply to the court to entrust an asset appraisal agency to evaluate the value of the equity. Therefore, appraisal has become the most common way to confirm the value of equity. The Beijing, Shanghai and Jiangsu High People's Courts all mentioned in their guiding opinions that the equity value should be determined through the method of valuation.
(1) Procedures for evaluation
In divorce proceedings, if there is a need to assess the value of the equity, it can generally be done in accordance with the following procedure:
1) The party claiming to obtain property compensation shall file an application for equity value appraisal with the court;
2) After the court accepts the application, it notifies both parties to determine the evaluation agency. Theoretically, it can be determined through negotiation between the parties, but generally speaking, the court determines it by lottery.
3) The parties pay the assessment fee, and in some places, the assessment fee is paid after the assessment result is released.
4) The court convenes the assessment agency and the parties to determine the content of the assessment, the scope of the assessment, the information required for the assessment, and the responsibilities of each party.
5) The appraisal agency asks the company for the balance sheet, income statement and accounting vouchers to evaluate the equity;
6) Both parties will express cross-examination opinions on the assessment report, and if necessary, will ask the assessment agency to make supplementary explanations or adjust the assessment results.
The court finally determines the equity value based on the appraisal report and the opinions of both parties on the appraisal report.
and (2) the method used by the appraisal agency to determine the value of the equity
The determination of equity value involves a number of factors, such as the company's financial situation, market prospects, industry competitiveness, and the ability of the management team. In divorce disputes, the valuation methods of the appraisal agency for equity value mainly include the asset base method, the income method and the market method.
1) Asset-based method: Evaluate the value of a company by assessing the difference between the company's assets and liabilities, which is suitable for companies with relatively clear assets and liabilities that are easy to value. An appraisal agency conducts a detailed appraisal of a company's assets and liabilities to determine the value of the company's equity.
2) Income method: The value of a company is assessed by the discounted value of the company's future cash flows, which is applicable to companies with stable cash flows and future earnings. The appraisal agency considers factors such as the company's future profitability, growth, and industry prospects to determine the company's equity value.
3) Market method: Evaluate the value of a company by comparing the market of similar companies**, which is applicable to companies in the same industry or type of company. The appraisal agency selects a number of comparable companies that are similar to the assessed company and assesses the equity value of the assessed company based on its market** and transactions.
In practice, the appraisal agency will comprehensively consider the specific situation of the company being evaluated and the applicability of the three methods to select the most appropriate method to assess the equity value. At the same time, the appraisal agency also needs to consider the financial status, operating conditions, industry characteristics and other factors of the assessed company to ensure the accuracy and fairness of the appraisal results.
(3) Information required for evaluation
The equity valuation needs to provide true, accurate and complete information, otherwise the appraisal results may be affected. At the same time, the appraiser needs to verify and verify the information provided to ensure the accuracy and reliability of the assessment results. Generally speaking, an appraisal agency needs a balance sheet, income statement and audit report, as well as accounting documents, when conducting an equity valuation. Of course, the information that the assessment body may need to provide will vary depending on the assessment method.
Compared with non-litigation evaluation, litigation evaluation is often more difficult because the parties are in opposing states. In many cases, the equity holders do not cooperate in providing the necessary information for the assessment. In this case, how will the court deal with it?In this regard, the Jiangsu and Beijing High People's Courts have the same idea in the Guiding Opinions, that is, "if the equity value cannot be assessed due to the company's chaotic management, incomplete accounting books, and the refusal of the company's operator to provide financial information, the balance sheet, profit and loss statement, net asset statement, and annual statements published by the company can be obtained from the tax and industrial and commercial departments and submitted to the appraisal agency for assessing the equity value." If the above-mentioned financial information cannot be obtained, the equity value can be determined with reference to the operating income or profit of local companies with similar operating scale and level in the same industry. ”
Compared with the Beijing High Court, the Jiangsu High Court has gone one step further and is more logically perfect, and has allocated the burden of proof, that is, if a party raises an objection to the value of the equity determined ex officio, it should provide financial information that can substantiate its claim.
3. Determine the equity value according to the company's net assets
The determination of equity value based on the company's net assets is actually the same as the principle of appraisal by an appraisal agency in accordance with the underlying asset method. The only difference is that the judge determines the equity value directly based on the company's net assets ascertained in the case, rather than through the appraisal of the appraisal agency. This is not the norm, and when the judge believes that the determination of the equity value based on the company's net assets is supported by sufficient and reasonable evidence, such as proving the company's net asset value through audit reports, asset appraisal reports, etc., the judge may use this method to determine the equity value.
It should be noted that there are also certain limitations to determining the equity value based on the company's net assets. For example, a company's net worth may not fully reflect factors such as a company's profitability, growth, and industry prospects, which have a significant impact on equity value. Therefore, when determining the equity value based on the company's net assets, the judge needs to consider a variety of factors and make a prudent judgment.
4. Determine the equity value through bidding
In its Guiding Opinions, the Beijing High People's Court pointed out that "when there is a dispute over the value of the equity to be divided in divorce proceedings, it shall be determined by means of consensus, appraisal, bidding, and reference to the market price." "As you can see, bidding is actually a supplement to situations that are not negotiable and cannot be evaluated. Other courts have not used bidding as a form of assessment. It can also be seen from this statement that the order of the Beijing High Court is negotiation, evaluation, and when the above two methods cannot be determined, it chooses to make a decision by bidding or referring to the market price.
The bidding method is limited to cases where both parties are eligible to acquire equity, such as: (1) a joint-stock company;(2) a limited liability company, in which both parties are shareholders of the limited liability company;(3) In the case of a limited liability company, the non-shareholder party obtains the consent of the other shareholders.
In fact, generally only if both parties agree and the above conditions are met, the judge will determine the equity value by way of bidding. Bidding may seem fair, but it often leads to a serious deviation from the actual value of the equity in the bidding results, resulting in substantial unfairness. If the result of the equity auction is seriously higher than the actual value of the equity because of the emotional behavior of both parties, or because the non-shareholder party does not understand the company's operating conditions and does not dare to bid, the result of the equity auction is seriously lower than the actual value.
In order to solve this dilemma, some judges in judicial practice have adopted the method of first appraisal and then bidding to determine the equity value, so as to ensure that the final determination of the equity value is within a reasonable range.
5. Determine the equity value according to the capital contribution
According to the principles of accounting, the value of equity should include four elements: paid-in capital, capital reserve, surplus reserve and undistributed profits. Among these four items, except for the paid-up capital that is relatively fixed, the other three items have been in constant flux.
In some cases, the judge may determine the value of the equity directly on the basis of capital contributions (paid-up capital). This is obviously inconsistent with the principles of accounting, but the law does not pursue accurate data, but fairness and justice. In some cases, this seemingly unreasonable way can quickly solve the problem and achieve substantive fairness and justice. In order to avoid the division of assets, some parties choose asset replacement to maliciously avoid debts, such as converting cash into company equity by establishing a company. At this time, if the equity is evaluated, it will be time-consuming and laborious, resulting in a serious waste of judicial resources. In this case, the judge can directly determine the capital contribution as the equity value.
Therefore, determining the equity value based on the capital contribution is a method that the judge has to do as a last resort, and can only be used when the company has been established for a short period of time and the equity value and investment have not changed much.
Fourth, the summary of the problem
There are many ways to measure equity value, including the basic method, the market method, the income method, etc. In divorce cases, the value of equity can be determined through negotiation, hiring a professional appraisal agency, bidding, etc. On the basis of ascertaining the facts, the judge may also determine the net assets, and even directly determine the amount of capital contribution as the equity value in some special circumstances.
It is important to note that the equity value is not exactly the same as the actual value of the company. The actual value of a company includes factors such as its net assets, profitability, and market prospects, while equity value is affected by factors such as market supply and demand, investor expectations, and so on. Therefore, when determining the equity value, it is necessary to comprehensively consider various factors and choose the appropriate method to determine it.