Valuing Unlisted Shares in Divorce Property Division: Choosing Between the Net Asset Method and DCF, and the Valuation Date

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

In the divorce of an owner-manager, the shares the owner holds in their own company are often worth more than their bank deposits or home. For listed shares, the stock exchange price is sufficient, but shares without a market price have no price that can be used as is. Even for the same shares in the same company, the valuation can vary greatly depending on whether it is calculated from the company's assets or from future earnings, and on which point in time's financial statements are used.

Disputes over valuation do not stay between the spouses. The other spouse will ask for disclosure of financial statements, schedules of fixed assets, business plans and other materials for the valuation. The company has to decide how much of its management information to release to outside parties.

No Provision on Valuation Methods, and the Order of Issues

The standard for property division is set out in Article 768(3) of the Civil Code (Japanese). The current provision, rewritten by the 2024 amendment of the Civil Code (Act No. 33 of 2024, effective April 1, 2026), provides that the family court determines the amount and method of division "taking into account all circumstances," including "the amount of the property that both parties acquired or maintained during the marriage and the degree of each party's contribution to its acquisition or maintenance, in order to achieve equity in property between the parties after divorce," and the length of the marriage. The latter part provides that the degree of each party's contribution is deemed equal unless it is clear that it differs.

This provision states only that the "amount" of property is to be taken into account and says nothing about how that amount is to be calculated. The method for valuing unlisted shares is left to the parties' agreement in a negotiated settlement, and to the court's judgment in an adjudication or judgment.

In disputes over company shares, the issues line up in the following order. First is whether the shares are subject to property division at all. Shares held before the marriage or inherited from a predecessor are, as a rule, excluded from settlement as each spouse's separate property (Article 762(1) of the Civil Code). This distinction, and the method of division, that is, whether to hand over shares or pay compensation, are addressed in An Owner-Manager's Divorce and Property Division of Company Shares. Once it is decided that the shares are included, the next questions are at what point in time and by which method they are to be valued. Once the valuation is set, the amount to be divided is generally calculated at a ratio of one half, so the choice of valuation method has the greatest impact on the amount.

The Valuation Date and Changes in Share Value After Separation

In property division, two reference dates are distinguished: the date that determines the scope of property subject to settlement, and the date for valuing that property.

Case law positions settlement-type property division as the settlement and distribution of "property substantially held in common by the spouses during the marriage" (Supreme Court, July 23, 1971, Minshu Vol. 25, No. 5, p. 805). Because the spouses' cooperation ends upon separation, current family court practice uses the date of separation as the reference date for the scope of property. In contrast, the valuation of that property is generally understood to be based on the time of the negotiation or adjudication.

Applying this distinction to company shares, the shares held at the time of separation are covered, and as a rule those shares are valued at their value at the time of the negotiation or adjudication. A considerable amount of time passes between separation and the conclusion of an agreement or an adjudication, and if the company's performance improves in the meantime, the increase in value from management efforts after separation is also included in the valuation. Conversely, if performance declines, the receiving spouse will have to accept a valuation lower than at the time of separation.

That said, if the increase in value is attributable solely to the owner-manager's own work after separation, it may be possible to ask that this be taken into account as one of "all circumstances" under Article 768(3) and that the amount of division be adjusted. There are also court decisions holding that circumstances after separation can be considered as "all circumstances" (Tokyo District Court, September 26, 2000, Hanrei Times No. 1053, p. 215). If the owner-manager intends to dispute the post-separation increase in value, they need to secure the financial statements and trial balances as of the separation date and be able to show that the subsequent increase resulted from business activities after separation, such as new orders or capital investment.

Options for Valuing Unlisted Shares

Methods for valuing shares without a market price have been debated extensively in the context of determining share purchase prices under the Companies Act. In determining the sale price of shares with transfer restrictions, courts have used the comparable company method, the precedent transaction method, the net asset method, the DCF method, the dividend discount method, the capitalized earnings method and others. Some decisions have not limited themselves to one method but have adopted a combined approach that mixes several methods in set proportions (for example, Fukuoka High Court, May 15, 2009, Kinyu Shoji Hanrei No. 1320, p. 20, which combined the DCF method and the net asset method at a ratio of 3 to 7).

In property division, too, the choice is made from the same group of methods. The thinking behind each is as follows.

• Net asset method: divides the net assets, calculated by subtracting liabilities from the company's assets, by the number of issued shares. There is a distinction between book net assets, which use book values, and market-value net assets, which restate real estate and securities at market value
• DCF method: discounts to present value the cash flows generated under the future business plan. It reflects earning power, but the result varies greatly depending on how the business plan and discount rate are set
• Dividend discount method: works backward to value from the dividends shareholders receive. Suited to valuing the shares of minority shareholders who are not involved in management
• Comparable company method: compares with the share prices and financial indicators of listed companies of similar industry and size. How comparables are chosen becomes a point of dispute

Attention must also be paid to the difference from tax valuation. In calculating inheritance tax and gift tax, the National Tax Agency's Basic Circular on Property Valuation sets out calculation methods such as the comparable industry method and the net asset value method. This is an administrative standard for tax practice and does not bind valuation in property division. Materials on inheritance tax valuation prepared by a tax accountant can serve as one reference for valuation, but they do not necessarily become the basis for division as is.

Valuing Company Shares Held by an Owner-Manager

An owner-manager's company shares are shares that confer control over the company. The dividend discount method presupposes the position of a minority shareholder who can expect nothing more than dividends, so it does not suit the valuation of controlling shares. Using this method for a family company that pays hardly any dividends would make the shares appear worth less than they actually are.

Some court decisions on property division have used the company's net assets as the basis. Although it involved a medical corporation, Osaka High Court, March 13, 2014, Hanrei Times No. 1411, p. 177, treated 70% of the medical corporation's net asset value as property subject to settlement. The net asset method has the advantage that it can be calculated from objective figures in the financial statements and market-value data for assets, and is less affected by the parties' projections of the future. On the other hand, for a company with few assets but high earning power, a valuation under the net asset method tends to fall below the value of the business. The receiving spouse argues for the DCF method or a combined approach in order to close this gap.

If the DCF method is adopted, the question is who prepares the underlying business plan. Only the owner-manager and the company can prepare a business plan, so the receiving spouse is likely to question whether the plan was prepared conservatively in anticipation of the divorce. From the owner-manager's side, basing the valuation on materials prepared independently of the dispute, such as plans submitted to financial institutions or the board of directors before the divorce issue arose, makes it easier to explain the reliability of the valuation.

Loans between the owner-manager and the company also affect the valuation. Money the owner-manager has lent to the company is, on the owner-manager's personal side, an asset in the form of a claim against the company, but on the company's side it is a liability that reduces net assets. The consistent treatment is to count the director's loan as property subject to division while deducting the same amount as a liability in valuing the shares. Calculating while looking at only one side results in double-counting the same amount or, conversely, leaving it out.

Property held in the company's name is itself the property of the corporation, not of the spouses. What is subject to property division is the shares held by the owner-manager, and the company's assets are reflected indirectly through the valuation of the shares. That said, where the company is in substance no different from a sole proprietorship run by the spouses, there are court decisions that included property in the company's name in the division (Hiroshima High Court, Okayama Branch, June 18, 2004, Hanrei Jiho No. 1902, p. 61).

The illiquidity discount is also a point of dispute. This is the argument that a certain percentage should be deducted from the valuation because unlisted shares have limited buyers and cannot be quickly converted to cash. Because the owner-manager keeps the shares and is the one paying compensation, whether a reduction based on difficulty of conversion should be allowed for shares that are not planned to be sold is an issue on which the receiving spouse is likely to push back.

Finally, there is the ratio of division after the valuation is set. The latter part of the amended Article 768(3) provides that the degree of contribution is deemed equal unless it is clear that it differs. If the owner-manager claims a contribution exceeding one half on the ground that the company's value results from their own special abilities, it is likely that the party making that claim needs to make clear that the degree of contribution differs. Among court decisions before the amendment, there is one that set the husband's contribution at 60% on the ground of the special circumstance of a medical license obtained before the marriage (Osaka High Court, March 13, 2014, cited above).

Disclosure of Valuation Materials and Information Disclosure Orders

All the materials that serve as the starting point for valuation are in the company's hands. The receiving spouse often does not have the company's financial statements, and whether the materials will be produced becomes a dispute in itself.

The 2024 amendments to the Civil Code and related laws also addressed procedure: Article 152-2(2) of the Domestic Relations Case Procedure Act (Japanese) provides that, in an adjudication case concerning a disposition on property division, the family court may, upon petition or on its own authority, order a party to disclose information on the status of their property when it finds it necessary. Failure to disclose without justifiable reason or disclosure of false information is subject to a non-penal fine of up to JPY 100,000 (paragraph 3 of the same Article).

If the owner-manager receives such an order, they may be required to disclose not only the number of company shares they hold but also the company's financial information to the extent necessary for valuation. For the company, deciding early with the owner-manager's counsel on the scope of materials to be disclosed, the handling of trade secrets such as business plans and customer information, and restrictions on using the disclosed materials for other purposes helps protect its relationships with business partners. Once it becomes clear that the valuation of company shares is likely to be disputed, gathering the financial statements for the most recent several fiscal years, real estate valuation materials and schedules of director loans and receivables allows the parties to move quickly into the discussion of valuation methods.