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LEGAL & FINANCE: Audit rules shake-up prompts warning.

Black Country law firm Higgs & Sons is advising people wishing to sell shares in private limited companies to look closely at the articles of association and shareholders' agreements after new ethical standards for auditors came into force earlier this year.

The standards, issued by the Auditing Practices Board, potentially jeopardise certain sales of shares in a private company which rely upon an auditor's valuation.

Frequently, pre-emption rights provide that those wishing to sell shares have to offer them to the existing shareholders at a price deemed fair by the company's auditors. However, with the introduction of these new standards, auditors may now have to decline to provide such a valuation where it involves a high degree of subjectivity or it has a material effect on the financial statements of the company.

Where this occurs, there may be no alternative valuing mechanism in place, effectively preventing any sale.

Damian Beard, associate in Higgs & Sons' corporate department, believes shareholders need to take a careful look at their company documents in order to prevent potential difficulties occurring.

He said: "The articles of association of a company usually require a shareholder to sell his or her shares based on the auditor's valuation. If an auditor is unable to provide this, then there is often no alternative provision set out. As a result, sellers may end up having to go to court to seek a valuation of their shares."

An exemption to the ruling does exist for small entities. This covers unlisted companies fulfilling two or more of the following criteria - a turnover of not more than pounds 5,600,000; net assets, as shown on the balance sheet, of no more than pounds 2,800,000; and not more than 50 employees.

Mr Beard said: "We recommend that companies review their shareholders' agreements and articles of association in light of these new standards, in order to prevent this happening
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Sep 23, 2005
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