March 2012
The Value of Reviewing Deeds,
Agreements and Documents
Constitutions, memorandums
or articles of association,
trust deeds, shareholder
agreements and/ or
partnership agreements
govern the operations of an
entity and set out the ongoing
entitlements of stakeholders
that must be taken into
account when valuing an entity
or entitlement.
These primary documents should be the
first documents that a valuer considers
when completing a valuation.
Constitutions and Memorandum
or Articles
A company’s internal management
is governed by provisions of the
Corporations Act 2001 (the Corporations
Act) that apply to the company known
as replaceable rules1, a constitution or
a combination of both (s135 and 136 of
the Corporations Act).
For most companies, the constitution is
drawn up prior to the registration of the
company and has the effect of a contract
between:
When valuing a company a valuer should
confirm whether the replaceable rules
have been displaced or modified by
the company constitution, as this may
impact the company’s operations and
shareholders rights and entitlements.
It is particularly important that a valuer
reviews the constitution to determine the:
n Rights of certain share classes.
For example:
n When parties hold an ordinary
share compared to a dividend
access share or voting share, or
n Specific shares with the ability
to impact control of an entity
including voting shares which
often do not have the ability to
access capital or income, but can
govern the access to capital and
or income
n The company and each member
n The company and each director
n The company and the company
secretary
n A member and another member.
n Specific terms around transfer of
shares. For example:
The constitution often refers to replaceable
rules (s141 of the Corporations Act),
which cover rights and duties of:
n Specific methods for determining
price on transfer (often not at
market value)
n Officers and Employees
n Rights of first purchase or rights
of first refusal on transfer
n Requirement for agreement of a
percentage of shareholders prior
to sale
n Limits on transfer of shares in a
particular period.
n Inspection of Books
n Directors Meetings
n Meetings of Members
n Shares
n Transfer of Shares.
Often, a company includes in its
constitution (by reference or otherwise) a
replaceable rule that does not otherwise
apply to it. Also, a provision of a section
or subsection that applies to a company
as a replaceable rule can be displaced or
modified by the company’s constitution.
1 Replaceable rules do not apply to proprietary companies where the one person is the sole director and sole member,
although a constitution may be adopted s135(1).
n Specific rights to capital and income
on winding up or liquidation. This
needs to be considered as a potential
method to remove shareholders or
continue trading in a new structure or
potentially as a result of litigation.
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The Value of Reviewing Deeds, Agreements and Documents
All of these may have a significant
impact on the method and value
of parties’ interests and potential
entitlements.
Trust Deeds and Entitlements to
Income
A trust is where a person (the trustee)
is under an obligation to hold property
for the benefit of other persons (the
beneficiaries).
A trust is not a separate legal entity, the
Trustee is the legal owner of the Trust
property and the beneficiaries hold the
beneficial interest in the Trust Property.
A trust deed defines the terms of the
obligation entered into between the
trustee and the settlor. It sets out:
n Details of the settlor and trustee
n Details of beneficiaries
n Details of the appointer (who can
replace the trustee)
n The duties and powers of investment
of the trustee
n The vesting date (the termination
date of the trust when the
beneficiaries / unitholders are entitled
to the whole of the trust fund).
It is important for a valuer to review a
trust deed when:
n Determining the appointer, who
controls the trust by virtue of their
ability to replace the trustee
n Determining if beneficiaries are
presently entitled to funds
n The retirement age (if any) agreed to
between the partners/shareholders
n The duties and powers of trustees
around investing trust funds and
making distributions
n Whether exiting and new partners/
shareholders pay for or receive value
of business assets, work in progress,
debts and tax liabilities on entry and
exit
n Determining who is entitled to
distributions of capital and income in
the event the trust fund vests.
Shareholder and Partnership
Agreements
When two or more individuals go into
business together it is advised that they
enter into a shareholders or partnership
agreement to formalises aspects of the
operations of their business including:
n Actual formation purpose and scope
n Management authority and duties
n Capital contribution issues
n Distribution or division of monies
n Terms and terminations
n Changes and transfers
When reviewing corporate entities, the
shareholder or partnership agreement
must be consulted. This is because it
usually sets out:
n Whether interest is payable on
outstanding loan, capital and current
accounts on entry and exit
n Whether a partner’s interest can
be transferred or is subject to
restrictions
Conclusion
When preparing a valuation, it is
important to review constitutions,
deeds and agreements as they can
reveal significant information about the
operations and entitlements of parties.
It is also wise for lawyers and the
relevant parties to be aware of this
before they instruct valuers as the
results may be significantly different
when specific agreements and
clauses of these documents are
taken into consideration.
n Whether goodwill is payable or not
(in respect of professional practices)
n The formulae or methodology agreed
to by the shareholders/partners in
assessing “value” on entry / exit or
other events
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The Value of Reviewing Deeds, Agreements and Documents
For Further Information
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Jenny Wheatley
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Tel +61 2 9619 1977
Mobile 0419 448 170
jenny.wheatley@crowehorwath.com.au
Lauren Cusack
Associate Principal, Forensic Accounting
Tel +61 2 9619 1895
Mobile 0414 937 967
lauren.cusack@crowehorwath.com.au
Deanna Chiang
Manager, Forensic Accounting
Tel +61 2 9619 1962
Mobile 0410 507 627
deanna.chiang@crowehorwath.com.au
Bill Jansen
Consultant, Forensic Accounting
Tel +61 2 9619 1867
Mobile 0419 206 955
bill.jansen@crowehorwath.com.au
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