If a minority shareholder in a private company wants to sell their shares, can they expect to achieve the same price they would get if the company itself was taken over?
- Generally, the answer will be no and the price a minority shareholder receives will usually reflect a discount from pro rata value for one or more of the following reasons:
- A purchaser is likely to pay a lower price if he will not obtain voting control of the company (the so-called “minority discount”)
- Private company shares are illiquid assets as there is no open market for them
- The company’s Articles of Association and/or any separate written shareholders’ agreement will often give its directors a discretionary right to refuse to register a share transfer, effectively amounting to a veto
- They may also contain valuation and/or pre-emption provisions that work in favour of existing shareholders
The combined impact of the above may well mean that the only possible buyers are other shareholders able to exploit their position as ‘the only game in town’ to buy the seller’s shares at a favourable price.
- The size of the minority discount could conceivably be modest (say 5% or less) or very substantial (75% or more) depending on specific circumstances. This can come as a very unwelcome surprise to a selling shareholder expecting to receive full price for their shares. However, all may not be lost as some situations may work in the seller’s favour, for example:
- The Articles of Association/shareholders’ agreement may specify that a departing shareholder’s shares must be bought at an undiscounted price
- A third party instructed to certify the fair value of the sale shares may decide that a minority discount is not appropriate, for example if the company has been run as a “quasi partnership”
- If the other shareholders are more anxious to buy than the seller is to sell
- Where there is no single controlling party owning a majority interest, the seller’s shares may be sufficient to give one shareholder voting control (a so-called “strategic” holding)
- Family situations, where the other shareholders are content for the selling shareholder to receive full price
The financial consequences of having or not having a minority discount can be very significant for the parties involved, and there may also be tax implications for the seller if HMRC considers that the sale price was more than market value. We have extensive experience of advising on the value of minority shareholdings in a sale situation and can be instructed to assist the buyer, the seller or the shareholders generally.