How to avoid a discount on the value of your shareholding
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Published: 18 Jan 2022
If you have a minority shareholding in your business, you could be in for a nasty shock when you come to sell your shares.
It is common practice for a discount to be applied to the valuation of your minority shareholding in a private company.
This discount reflects the relative lack of control or influence that you may have over the majority shareholder(s) in connection with the direction, management or dividend policy of the company. Such discounts can range between 5% and 95%, depending on the size of your shareholding. So, the value you thought you had could be considerably less.
There are two ways that minority shareholding discounts may be avoided.
Articles of Association
Firstly, the Articles of Association (the company “rule book”) may be amended to incorporate a provision that all shareholdings are valued on a “pro rata basis”. That is, your shareholding is valued as a proportion of the total number of shares in the company, with no discount for the shareholding being less than 100%. Some fine tuning needs to be done if there is more than one type of share in the company with different entitlements.
Quasi-partnership
Secondly, if there is no such provision in the Articles as described above, you may be able to rely on the company being treated as a “Quasi-partnership”. This is a development of case law through the courts as opposed to statutory law through parliament.
The major case on Quasi-partnership is Ebrahimi v Westbourne Galleries (1972). The principle established in this case is that there is a certain type of company in which the relationships between the shareholders were more akin to that of partners.
Briefly, the conditions that satisfy the definition* of a Quasi-partnership are:-
a) An association formed or continued on the basis of a personal relationship involving mutual confidence.
b) An agreement or understanding, that all, or some of the shareholders shall participate in the conduct of the business.
c) A restriction on the transfer of members interest in the company.
It is preferable to have the first option in place to avoid unnecessary legal fees in establishing a Quasi-partnership.
If you wish to investigate this further for either your company, or your business or private clients, do give me a call on 07749 080 806 or email me at [email protected].
*Proper legal advice should be taken on the definition and use of Quasi-Partnerships.
