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In the recent decision of Mignone & Barton [2024] FedCFamC2F 344, the Court found that as Mr XX valued the business at $437,000, the value of the Wife’s 50 per cent share was $218,500.
This simplistic view is all too common, where lawyers, accountants and even business valuers ignore discounts that can apply to when a company is not wholly owned.
Two discounts regularly applied in the valuation of a private company are:
A discount for lack of control can apply when the ability of a shareholder to influence management and/or control of the company is encumbered having regard to the corporate documentation.
For example, a company’s constitution and/or shareholder’s agreement may prevent a shareholder holding a certain level of shares the ability to influence the operations of the company including the appointment of Directors, the payment of dividends, the sale of assets or winding up of the company.
Other common considerations under can include:
In relation to discount for lack of control of minority interests (shareholdings of 50 per cent or less), general control premium studies can provide supporting evidence as to the appropriate size of the discount.
However, the size of the discount will also depend on the interest of the stakeholder and the interest of the other shareholders, particularly where there is one shareholder that exerts significant control over the company.
A discount for lack of marketability is distinctly different in that the shareholder may be able to sell their shareholding however, there may be a limited number of potential buyers. A discount such as this is to recognise the impediments associated for a willing seller who may not be able to easily convert their minority shareholding into cash.
Common considerations can include:
In a public company context, thinly traded listed shares are an example where a discount for lack of marketability may be applied. This occurs when a shareholder holds a significant number of shares in a listed entity, but due to the lack of trading volume it may take the shareholder a considerable length of time to sell the parcel of shares, or where placing the entire holding onto the market is likely to see a reduction in the value of the listed shares.
There may be times where one, both or neither of DLOC / DLOM are appropriate when valuing an interest in a company and you should always seek expert advice when it comes to these issues in any litigation scenario.
In the matter of Rowland & Rowland [2024] FedCFamC2F 7, the Court explored the reasonableness of the implied discount in the value of the shares held by the husband.
The key facts of the matter were as follows:
The Court found that:
I am satisfied that the correspondence between the legal representative for the husband and the L Pty Ltd partners indicates that the negotiations were undertaken in good faith and were bona fide. The negotiations had regard for both the terms of the Shareholder’s Agreement and referred to the Business Valuation Report.
I am unable to conclude that the husband embarked upon a course of conduct designed to reduce or minimise the effective value or worth of the matrimonial assets. Nor am I satisfied that in selling his share, the husband acted recklessly, negligently, or wantonly. [81 – 87]
In so doing, the Court agreed with the ‘discount’ on the pro rata value negotiated by the husband. This decision provides ‘real-life’ evidence for business valuation professionals regarding the concept of discounts and the interplay with the acquisition of one party’s interest.
If you need assistance with a business valuation in your dispute, please reach out to our team of experts today.
