Unlisted Shares: How to determine their “real value”?

Your shareholders’ agreements, partnership agreements, or articles of association often refer to the “real value” of shares, for instance, in share buy-back clauses (so called escape clause). However, this concept, while central, is not defined in the law. This lack of precision can be a source of significant conflict, particularly when these clauses are triggered by a shareholder’s exit, an inheritance, or the exercise of a pre-emption right.

This paper aims to clarify this concept based on the case law of the Federal Supreme Court, providing you with key insights to secure your agreements.

1. “Real Value”: A Concept shaped by case law

Although the law does not define “real value,” several articles in the Swiss Code of obligations (CO) refer to it, for e.g.:

• Art. 685b CO for companies limited by shares (SA) and
• Art. 789 CO for limited liability companies (Sàrl).

However, the law provides no method of calculation.

In the absence of any statutory guidance, it fell to the Federal Supreme Court to clarify the scope of this concept. In a landmark decision (ATF 120 II 259), it established that “real value” must be understood as the objective and total value of the company. This resulting case-law definition has become the standard of reference in Swiss civil law for the valuation of unlisted shares, including within the framework of a shareholders’ agreement that uses the term without defining it. A judge will interpret the contractual notion of “real value” in light of this legal standard.

2. Valuation methods recognized by the Courts

According to this Federal Supreme Court’s case law, “real value” means that the acquirer of shares is entitled to full compensation based on the shares’ intrinsic value (ATF 92 III 20 and ATF 110 II 293). According to the prevailing authors, expressly adopted by the Federal Supreme Court, this means:

• An objective value, determined as the total value of the company, which includes both its net asset value and its earnings value.
  1. Net Asset Value (Substanzwert): This corresponds to the company’s net assets—the value of all its assets (machinery, buildings, cash, patents, etc.) after deducting its liabilities. It includes hidden reserves (e.g., the surplus value of a property recorded on the balance sheet at its acquisition cost). It is a snapshot of the company’s “tangible” worth.
  2. Earnings Value (Ertragswert): This is based on the company’s ability to generate future profits. It is calculated by capitalizing the average profits of recent years, while also considering foreseeable development prospects. It reflects the company’s economic potential.
• The assessment must be based on the going concern principle, assuming the business continues as it is actually managed, not based on what would be economically optimal. The Federal Court states that it is the decisions subjectively intended by the management that serve as the basis, and not an ideal policy of maximisation;
• the liquidation value is not a minimum threshold; it applies only if liquidation is inevitable or if profitability is being artificially depressed with the intention of causing harm;
• Integration of foreseeable future developments must be integrated into the prospective valuation.

Under the escape clause, the point in time for valuation is that of the application for entry in the share register. By analogy, this will in principle be the point in time of the event triggering the right of purchase in the case of the exercise of a right of first refusal, a right of pre-emption or any other similar event.

As regards the valuation procedure, the Geneva Court of Justice (ACJC/296/2006, para. 6.2) expressly states that it is permissible to determine the actual value through a prior valuation procedure carried out by a third party (the company’s auditor or an external expert), whilst the judge retains the power of final decision.

We also mention the “practitioners’ method,” developed by tax authorities, which can also be used.

Its calculation is a weighted average, giving more weight to earning potential:

• Earnings value (weighted x2)
• Net asset value (weighted x1)

Simplified formula: (Earnings Value x 2 + Net Asset Value x 1) / 3

3. The crucial importance of defining the valuation method in advance

The best way to avoid a dispute is to precisely define the calculation method in your agreements.

• Contract interpretation: In case of a disagreement over a clause that mentions “real value” without defining it, a judge will refer to the standard established by the Federal Supreme Court. They will therefore most likely apply a method combining earnings value and net asset value.
• Valuation Clause: To avoid any uncertainty, your various agreements, especially your shareholders’ agreements, should contain a clear valuation clause. You could, for example, provide that the value of the shares will be determined:
  • According to the “practitioners’ method” as defined by tax circular no. 28.
  • By the company’s auditor or an independent expert, specifying the calculation principles to be applied.
  • According to a specific formula adapted to your sector of activity.

Conclusion: Plan ahead to avoid disputes

The “real value” of shares is a precise legal concept, even if it is not defined in the law. The case law of the Federal Supreme Court has established that it represents the objective, total value of the company, combining its substance and its earning capacity.

A precise valuation clause in your contracts is your best protection. It binds the parties and prevents disputes by setting the rules of the game in advance. Leaving the notion of “real value” undefined in your agreements opens the door to differing interpretations and costly conflicts, as each party will tend to favour the calculation method that benefits them most.

We recommend that you do not settle for the simple formula “real value.” Take the time, with your partners and advisors, to define and formalize in your agreements the calculation method that best reflects the economic reality of your business. A clear agreement today is the guarantee of a healthy relationship and a smooth separation tomorrow.