Evaluation of how an auditor determines the prices of shares

How does an auditor audit to determine the prices of shares? It is very common that contracts for company M&A operations involve the valuations of their shares in different cases.

A first assumption is that of “Bad leaver,” a discrepant partner with parity equity or the traditional execution of guarantees, among many other features.

Therefore, it is appropriate to briefly reflect on how this mechanism operates. The Companies Act, technical auditing standards, and some recent consultations in this regard shed light on this controversy.

The Companies Act, in its article 353, requires the participation of an external auditor to prepare a report to determine the valuation of the shares of a company, in the event of exclusion or separation of partners, in a subsidiary manner, when an agreement between the company and the partner on said value has not been reached.

In this sense, the Companies Act requires that the report be made by an independent auditor, different from the company auditor, who will be appointed by the Mercantile Registry of the registered office, at the request of the company or the owner of the shares.

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Transmission Value

The appointed auditor must not issue an opinion, as that term is understood in an audit of accounts. The account auditor must determine a transfer or redemption value of the shares based on a judgment. As an independent expert in accounting, economic and financial matters, they will work from the analysis that they have carried out on the documentation, and information that they have previously requested from the company: once the necessary verifications have been carried out, this will allow them to corroborate the financial and accounting data in the power of  society.

The technical standard of auditing on the valuation of shares was published by Resolution of the Institute of Accounting and Auditing of October 23, 1991, which guided the auditor in the methods that may be applied, and in the procedures to be followed for the determination of such value.

Common methods of determining the price of shares

Based on this standard, the auditor must use the methods that, if applicable, are appropriate to the circumstances and context of the company. The most common are:

(1) valuation of stock market quotation,

(2) value of real net assets,

(3) value of capitalization of results and

(4) current value of net monetary flows.

Regarding the procedure to be followed, it varies substantially if we are dealing with listed companies (the auditor will verify the average price of the last quarter compared to the date of the share transfer agreement) or if the auditor should value the shares of unlisted companies.

In the latter case, the auditor shall audit the accounts of the company and request from the management team information on all those events that, with sufficient importance, could have affected the company in the period between the audited accounts and the date of the special report of valuation, performing in turn all the procedures that they deems appropriate; among other actions, this can include holding meetings with the management team and employees of financial areas, reading the available minutes of meetings and councils, and previous agreements related to the valuation of shares.

It should be ensured that the drafting of the Audit Technical Standard on the valuation of shares obeys the regulatory regulations of that time, without the corresponding update having taken place in order to adapt to the legal changes subsequently carried out, so that its content is focused on the fact that whoever performs the valuation work is the auditor of the company’s accounts or, if the latter is not obliged to audit its annual accounts, the auditor appointed by the  Comercial Registrar.

Companies obliged to audit

As it currently stands, if the company is obliged to audit its accounts, the auditor appointed by the commercial registry, in order to carry out their assessment, will have to determine whether they are going to conduct a new audit of the annual accounts audited by the company’s auditor (with the consequent economic and time costs that this would entail) or if they can be supported by the work and audit report already carried out by the company’s auditor while applying the review procedures that they deem necessary to such work (In this they may also have to provide guidance to this with respect to the provisions of the technical standard, and considering the relationship between auditors while looking at each others’ work when the auditing of consolidated or individual annual accounts is being carried out).

In any case, the auditor may go for the route that, according to their professional judgment, is more reasonable, taking into account the specific circumstances that apply to the case (Consultation No. 3 of BOICAC 89 / MARCH 2012).

In relation to the structure of the final audit report, which must be issued within two months after the appointment has been made by the Mercantile Registry, in a generic manner (since in each specific case a wide variety of circumstances can occur), it will be necessary to include an introduction, a description of the characteristics and conditions of the object of the transmission, a description of the work carried out, and finally, the conclusion about the value of the shares to be transmitted, including the restriction of the use of the special report on the valuation of the actions to the specific case.

Auditor’s fees

The auditor’s fees for the completion of the report will be set prior to the start of the process, corresponding to the company’s payment of such compensation because, as interpreted by the doctrine, the designation of the auditor will respond in some way to the inability of the shareholders to reach an agreement with a particular shareholder.

Notwithstanding the above, in cases of exclusion, the expenses generated by the payment of the auditor’s fees are not paid in full by the company; the excluded member also participates in said payment in proportion to their participation in the social capital, discounting such fees from the amount to be reimbursed to each shareholder.

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[1] Value at which the shares could be sold on the secondary market on dates close to the reference date.

[2] Book value of own funds, adjusted for capital gains or losses that may be evident in the assets, rights and obligations of the company at the reference date.

[3] Sum of the expected future results of the company during a given period, discounted at the time of the evaluation.

[4] Sum of the current value of all future treasury flows expected from the company; all discounted at the time of the evaluation.