The Commercial Code and Company Valuation (Part III)

We continue the series of articles on company valuation in the Commercial Code. We have already examined the Registered Partnership and the Limited Liability Company; let us turn to the Joint-Stock Company.

We continue the series of articles regarding the issues of company valuation in the Commercial Code (hereafter known as ‘the Code’). We have already examined the Registered Partnership and the Limited Liability Company; let us turn to the Joint-Stock Company. Today we present the first article for this legal form. We shall consider the foundation of a joint-stock company stage…

In the event of founding a joint-stock company or increasing its share capital, when the in-kind contribution consists of (among others) shares, stocks, an organized part of an enterprise, real estate, machinery and equipment, and trademarks, the necessity arises to define the value of the contribution, in other words to make a valuation. Article 311 paragraph 1 provides that in the event of any in-kind contributions, the founders of the company shall draw up a written report which should list, in particular, (among other things):

the subject of the in-kind contributions, as well as the number and type of shares and other titles of participation in the income or in the distribution of assets issued in exchange,
the entities (shareholders) who contribute in-kind, assign assets to the company or receive remuneration for services,
the valuation method of the contribution in-kind used.

Paragraph 2 further provides that intended transactions should be justified in the report, covering also the matter of shares being issued for in-kind contributions and the amount of remuneration or payment. It goes without saying that the founders should have a valuation of in-kind contributions – the Code does not specify whether this valuation should be carried out by a separate entity, or whether the founders are able to prepare such a value estimation themselves. It should be added, as an aside, that if the subject of an in-kind contribution were real estate, it appears that, in accordance with the prevailing law, such a valuation may only be carried out by a certified real estate appraiser (rzeczoznawca majątkowy). This would exclude the preparation of the valuation by the founders themselves, unless there were to be a real estate valuator among the founders. Yet even such an exception seems to be moot in view of the principle of impartiality and the absence of conflict of the real estate valuator’s interest during the appraisal assignment.

In the next step, pursuant to article 312, paragraph 1, the founders’ report should be submitted for examination by one or more auditors in terms of its accuracy and reliability. In particular, the purpose of the examination is to issue an opinion regarding the fair value of in-kind contributions and whether it corresponds to at least the nominal value of the shares or a higher issue price of the shares being issued. In addition, paragraph 4 provides that the auditor’s opinion should evaluate the method of valuation of in-kind contributions adopted in the founders’ report. The conflict between paragraphs 1 and 4 generates significant discrepancies as to the required scope of work of the auditor. Paragraph 1 suggests that the auditor should make the valuation of in-kind contribution himself – issuing an opinion on the value is in fact the crucial part of the valuation process. Paragraph 4, in turn, suggests that the subject of the work of the auditor should be to issue an opinion on the valuation contained in the founders’ report, namely that he should evaluate the methodology of valuation of in-kind contributions.

Well ... it would be appropriate that on the occasion of the next updates to the Code, the legislator should clarify what is expected of the auditor in this specific case. If the legislator really expects the auditor to issue his opinion on the value of in-kind contributions – in other words, he will make the valuation – there is no need in such a situation to make a separate assessment of the methods used in the valuation contained in the founders’ report. The business practice indicates that auditors do not usually conduct separate valuations, and only evaluate the valuation methodology used in the founders’ report and, on this basis, issue an opinion on "what is the fair value of in-kind contributions". The question arises in this case of whether the evaluation of the methodology used in the valuation of contributions in-kind in the founders’ report gives the auditor adequate grounds to issue an opinion on the value of the assets contributed. My experience as a person carrying out valuations and also evaluating appraisals carried out by other experts leads me to state that it does not. It is one thing to carry out the valuation itself and to issue an opinion on the value of assets, and another to assess a valuation made by another specialist, and even something else again is the assessment of the methods used in the valuation alone.

We recommend

15 tips for perfect preparation of business valuation by comparative approach

The beginning of the year. A time of new resolutions.
In this time of new resolutions, the resolution to perfectly carry out the comparative (market) approach in the process of business valuation fits perfectly. Readers of my note, a little distant from the fascinating issue of business valuation, I inform you that we have three approaches to business valuation:

property (cost),
income-based,
comparative (market).

Valuation of enterprises and companies in times of inflation

High inflation in Poland and around the world affects many areas of economic life. Such examples may be the rising costs of debt of individual governments - a function of the higher yield on government bonds required by investors, or declines on stock markets reflecting the increasing cost of capital resulting from increased macroeconomic risk.

Transaction and valuation. Locked box or completion accounts? Time for a locked box...

The two most common price setting mechanisms in share sales transactions are locked box and completion accounts . Both approaches address the main issue in business sale transactions in a different way - the possibility of adjusting the transaction price due to the time difference between the date of the last financial data of the sold company available to the buyer and the date of the relevant contract (the so-called closing date ). It is common sense to assume that the latest financial data of the subject of the sales transaction are subject to examination by the buyer and then become the basis for negotiations and setting the price on the date of the preliminary contract (so-called signing date ).

EBIT or EBITDA? Or maybe EBIT?

Of course, EBIT . Next, EBITA . Simple and obvious.
But we also have many supporters of EBITDA . But why? The topic is a bit complex - we have the illusory power of EBITDA, the disadvantages of EBIT and a new quality, i.e. EBITA...

Why are P/E and P/BV multipliers passé in company valuation?

I have already written once about the reliability of commonly used P/E and P/BV multipliers... but the questions and comments sent to us encourage us to address the issue again...

Blog

The Commercial Code and Company Valuation (Part III)