All business valuers accept the fact that minority shares hold discounted value. It’s understood that minority shares have reduced flexibility, fewer rights, and less access to cash-flow benefits.
BVWire—UK, therefore, noted a great COVID-19-era summary of the Companies Act from Slaughter and May lawyers Hayden Cooke and Murray Cox. Their summary reviews the rights and privileges accorded to different levels of ownership and can help financial analysts more clearly define why minority values should be decreased—often quite dramatically.
The Cooke and Cox analysis appeared earlier this year on lexology.com and is an extract from the upcoming Corporate Governance Review, 10th edition.
A selection of rights considered in their summary, all of which impact the relative discount appropriate to minority positions for UK enterprises, include such Companies Act rules as:
- Rights of shareholders holding as little as 5% of the voting rights to ‘requisition a meeting, and add any item to the agenda or add any item to the agenda for the company’s AGM’;
- Protections against secondary share offerings (by simple majority resolution) either via the Companies Act, or in practice guidelines observed by directors;
- Relative protections afforded shareholders regarding transactions such as incentive plans and major acquisitions;
- ‘Any proposal to acquire control (defined as 30 per cent or more of the voting rights) of a company subject to the Takeover Code requires an offer to be made to all shareholders on the same terms’; and
- Practical access to some listed company standards such as, in principle, the concept that information must be made available simultaneously to all shareholders.
Cooke and Cox also reference other UK rules that may indirectly influence the powers and discounts of shares held by minority owners, such as guidelines for institutional investors, the Listing Rules, and the Takeover Code.