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"Clowns to the Left of Me... Jokers to the Right" What's the Value When You're Stuck in the Middle?

So we're  trying to value a 50% interest in a company. We've determined the value of 100% to be $10 million - but 50% is not worth $5 million since we still have to take into account the appropriate discount for lack of control.

If we were valuing a 5% interest, the rationale for the discount is clear - the owner of that interest can exercise almost no influence over the management of the company. A 50% shareholder is in a very different position but how does that affect the magnitude of the discount?

 
Our first step would be to look at the bylaws and any shareholder agreements that contain provisions relating to the level of shareholder approval required for key activities. If the documents are silent, then we would also review the applicable provisions of the relevant state code which may require the approval of two thirds of the shareholders (or in the case of an LLC - the unanimous consent of the members) for the sale or merger of the company or for its dissolution.

 

We would consider the interaction of these provisions with the existing ownership structure of the company: Our analysis would be different if the other 50% was held by one shareholder or by 50 1% shareholders. In the first case, the company is in a potential stalemate situation and the control level essentially is only the power to block - as a result the discount is higher. In the second case, the amount of control in the subject interest is high since it is unlikely that 50 shareholders could coordinate action to oppose the holder of the subject interest. If the Virginia Code applies and a two-thirds majority is required for major actions, then theoretically the level of control is reduced, since only 34 shareholders rather than 50 shareholders would be necessary to block those actions - and the discount would therefore be higher.

 

Interestingly, it should also be the case that if the provisions of the Virginia Code do apply, then evens an interest in excess of 50% and below 67% could attract a (small) discount since the two-thirds super majority requirements limit unilateral actions by the majority owner.