Minority discount is an economic concept reflecting the notion that a partial ownership interest may be worth less than its proportional share of the total business. The concept applies to equities with voting power because the size of voting position provides additional benefits or drawbacks. For example, ownership of a 51% share in the business is usually worth more than 51% of its equity value—this phenomenon is called the
premium for control. Conversely, ownership of a 30% share in the business may be worth less than 30% of its
equity value. This is so because this minority ownership limits the scope of control over critical aspects of the business. Share prices of public companies usually reflect the minority discount.
This is why take-private transactions involve a substantial premium over recently quoted prices.
Properties of minority interest
On a per-share basis, buyers will pay less for minority interest versus a controlling or majority interest because a minority position strictly limits investors to make crucial business decisions. Below are some drawbacks penalizing minority shareholders.
*Minority owners do not manage the business.
*They cannot initiate a sale or liquidation of the business.
*They are limited to elect the company directors and to appoint its officers.
*They do not hire or fire employees.
*They do not declare and distribute dividends.
*They do not enter into contractual relationships with customers and suppliers.
*They do not raise debt or equity capital for the company.
*They do not approve strategy plans,
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...
, or
capital expenditures
Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
.
Minority protection
The worse the minority shareholders' protection, the higher the minority discount. Nevertheless, minority owners may decrease the discount attached to their holdings. Some strategies to do so include inviting independent
non-executive director
A non-executive director (abbreviated to non-exec, NED or NXD), independent director or external director is a member of the board of directors of a corporation, such as a company, cooperative or non-government organization, but not a member of th ...
s and
shareholder activism. The activism can take several forms:
proxy battles, publicity campaigns,
shareholder resolutions
With respect to public companies in the United States, a shareholder resolution is a proposal submitted by shareholders for a vote at the company's annual meeting. Typically, resolutions are opposed by the corporation's management, hence the insi ...
, litigation, and negotiations with management.
See also
*
Associate company
An associate company (or associate) in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial sta ...
*
Business valuation Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing t ...
*
Consolidation (business)
In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, ''consolidation'' refers to the aggregation of financial statements of a ...
*
Corporate governance
Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...
*
Drag-along right
*
Market for corporate control __NOTOC__
The market for corporate control is the role of equity markets in facilitating corporate takeovers. This was first described in an article by HG Manne, "Mergers and the Market for Corporate Control". According to Manne:
In this way th ...
*
Minority interest
In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 5 ...
*
Pre-emption right A pre-emption right, right of pre-emption, or first option to buy is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity. It comes from the Latin verb ''emo, emere, emi, ...
*
Tag-along right
Tag along rights (TARs) comprise a group of clauses in a contract which together have the effect of allowing the minority shareholder(s) in a corporation to also take part in a sale of shares by the majority shareholder to a third party under the s ...
*
Voting interest
Voting interest (or voting power) in business and accounting means the total number, or percent, of votes entitled to be cast on the issue at the time the determination of voting power is made, excluding a vote which is contingent upon the happenin ...
References
External links
{{corporate finance and investment banking
Corporate finance
Equity securities
Stock market
Mergers and acquisitions