Changes in the ethical standards set down for accountants by their professional body raise issues for many companies that need to undergo a valuation.

Occasions when this might arise include the full sale of a firm or simply a shareholder wanting to sell.

The main effect of the revised guidelines is in the day-to-day course of business for companies with standard articles of association and/or a shareholders agreement that contain pre-emption provisions that require any shareholder who wants to sell their shares to offer them first to the existing members at market value.

Previously, where the shareholders could not agree on a valuation of shares, the company's auditors would determine the shares' "market value".

The changes to the ethical standards prohibit auditors, in certain circumstances, from providing such a valuation service to their client companies. Herein lies the problem.

If company auditors refuse to provide a valuation and there is no agreement among the shareholders as to an alternative valuation procedure, then there will be a deadlock. As yet there is no definitive legal authority on where this leaves the parties.

Recent case law seems to suggest the courts may not assist where a company's articles state that it's essential for the valuation process to be carried out by someone with special knowledge of the company.

Another option would be agreeing to pay the outgoing shareholder a lot more for their shares than they are worth, or winding up the company and starting again.

In any event, it is clear that none of the potential scenarios is commercially desirable.

Companies should act now to ensure they avoid placing themselves in such a position.

The solution involves a review of the company's articles or shareholders agreement, which can be amended to provide for an alternative valuation mechanism, such as an experienced valuer appointed by the President of the Institute of Chartered Accountants.

There is an exemption for smaller companies that have turnover of no more than £5.6m, a balance sheet of no more than £2.8m and fewer than 50 employees.

Companies that meet at least two of these criteria will be exempt from the amended standards and their auditors will still be able to carry out valuations.

* Ross Paterson is a solicitor at Blackett Hart & Pratt in Darlington. For more information, contact him on (01325) 466794.