Not all shares are equal ...
“I hold 20% of the shares in a business that has just been valued at £1m in total. That means my investment is worth £200,000”.
Very rarely will the above statement be correct. Unfortunately, the reality is that the shares in the above example are not worth that much. In most cases they will be worth less than £200,000.
Shareholdings of different levels carry differing levels of shareholder power. There are certain thresholds such as 25%, 51%, 75% where power increases. It is not necessarily the case that each individual share is worth the same.
Different blocks of shares in a business can be worth different amounts depending on how the shares are divided between shareholders.
The following table sets out the understanding of control on the open market:
If shares are widely spread then shareholders may need to look to associations with other shareholders to see if these groups go over the above thresholds in aggregate. E.g. husband and wife considering their shareholdings as one holding.
Where there is a shareholding of less than 100% the holder of those shares needs to understand that there may be a discount applied to their shareholding compared to the simple pro-rata value. The level of discount applied will increase depending on the relative “minority” of the shareholding. For example a shareholding of 20% would have a much larger discount applied than a shareholding of 60% to reflect the difference in influence and power of the two shareholdings.
To make matters more complicated an individual share might actually have two values – a low value and a high value. Consider the following company structure:
If shareholder – B was looking to sell their shares then shareholder – A may be willing to pay proportionately more for those shares than shareholder – C, D or E. That is because the 10 B shares would take shareholder – A over the critical 75% threshold where they would command total control over the business. For shareholders C, D and E the extra 10 shares would proportionally increase their holding but their level of influence on decision making would not increase as much as it would for shareholder – A.
In rare cases minority holdings may be valued with no discount applied – i.e. a simple pro-rata of the whole. The most common reason for this is where the shareholders act in a mutual benefit way for all shareholders. Often this is the case with family businesses where the shareholdings do not necessarily reflect the split of responsibilities and control. Businesses like this are referred to as quasi-partnerships.