Shareholder Disputes and Minority Shareholder Discounts

How shares are valued in a shareholder dispute is often fiercely disputed.

For instance, those defending an unfair prejudice claim and at risk of a court-ordered purchase will almost certainly argue a discount ought to be applied when valuing the shares to reflect any minority shareholding.

This is because it is likely the pool of willing buyers of a minority shareholding (aside from current shareholders who are looking to increase their shareholding by buying the minority shareholder's shares) will be very small.

That argument makes sense since, typically, a minority shareholder has fewer voting rights and less control over the company's affairs.

A discount should, therefore, reflect that a minority shareholding may be worth less on the open market than a larger shareholding.

The discount level will vary from case to case, but it can represent a significant percentage deduction on the pro-rata value of the minority shareholding.

The position is less clear if a party cannot establish a quasi-partnership exists or where one does not exist.

In that case, a discount would normally be expected to be applied for a minority shareholding. However, recent case authority suggests that is not always the case.

The case of Smith v Smith & Anor [2022] EWCA Civ 825 involved an unfair prejudice claim brought by a minority shareholder who sought relief by way of a purchase of his shares.

The case related to a family investment company which was found to be a quasi-partnership. The court provided some interesting commentary regarding the approach to valuing the shares, stating there is no presumption of applying a discount simply because a quasi-partnership did not exist.

In coming to its decision, the court agreed with the petitioner that even if the company is not a quasi-partnership, it would not be appropriate to treat the petitioner as a "willing" seller since the petitioner would have preferred to continue as a director and shareholder in the company but was forced to bring an unfair prejudice petition because of the respondents' actions.

In those circumstances, it was not appropriate to apply a discount.

This decision illustrates how a litigant's conduct can influence the court's approach to valuing shares and how the court will be reluctant to reward unfairly prejudicial conduct by a respondent.

In those circumstances, the court may determine a minority shareholders discount ought not to be applied