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 a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
, or
capital expenditures.
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 directors and
shareholder activism. The activism can take several forms:
proxy battles, publicity campaigns,
shareholder resolutions, litigation, and negotiations with management.
See also
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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 st ...
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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 ...
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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 group ...
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Corporate governance
Corporate governance refers to the mechanisms, processes, practices, and relations by which corporations are controlled and operated by their boards of directors, managers, shareholders, and stakeholders.
Definitions
"Corporate governance" may ...
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Drag-along right
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Market for corporate control
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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 ...
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Pre-emption right
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Tag-along right
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Voting interest
References
External links
{{corporate finance and investment banking
Corporate finance
Equity securities
Stock market
Mergers and acquisitions