Couzens’ Minority Discount

In April 1919, Henry and Edsel Ford owned 58.5% (11,700 of the 20,000 shares) of Ford Motor Company. One minority shareholder of the Ford Motor Company, James Couzens who was Mayor of Detroit at the time, owned 2,180 shares, giving him a 10.9% stake. The Fords’ were looking to buyout their minority shareholders and Couzens was willing to sell to them. Couzens agreed to sell all of his shares for $13,444/share, just under $30,000,000.

Had Couzens’ been around today, he might have sold his shares for a lesser amount as a result of his shares reflecting a minority discount in the value.

 A minority discount reflects the fact that you own a piece of a business but don’t control the affairs of the operation. For example, if your shares are worth $10,000,000 but you only own 20% of the business, your $10,000,000 could potentially only be worth $8,000,000 because there is a 20% minority discount.

A minority shareholder won’t have much say on the amount of dividends declared, the election of directors to the board or the direction the corporation should take. The discount might be as large as 50% for your shares or could be as little as 5%. The factors that go into deciding the discount are subjective and rely on the following:

1) Size of the shareholding and its relative importance to the size of other shareholdings

The size of your shareholding and its relationship to the size of other shareholders’ ownership in the company is an important factor. If one of your fellow shareholders has in excess of 75% (or 66 2/3% for corporations incorporated under the Canada Business Corporations Act) of the voting stock, they have the ability to pass special resolutions and amend the articles of a company as they please. Obviously they cannot act in an oppressive manner towards minority shareholders’. But they have direct control over the operations without needing your input.

 If 90% or more of a company has been acquired in a takeover bid, a shareholder owning 0-10% may be compelled to sell their shares under a compulsory acquisition provision (depending on the corporation’s act) and not be able to stop it.

2) Existing shareholders’ agreement

Depending on what your current shareholder agreement states, this document can increase or decrease the minority discount. Some examples of items found in a shareholders’ agreement could be:

·      Restriction on transfer of shares – If other shareholders need to approve your sale of shares to someone, this would increase the discount.

·      Restriction that when shares are sold they must be offered first to other shareholders

3) Articles of Incorporation and By-laws

Depending on where your company is incorporated as well as what’s contained in the corporate documents, there are certain restrictions and rights that could help a minority investor when valuing your shares. In Canada, these rights include dissent and oppression remedies as well as the possibility to provide a minority shareholder with liquidity should a large outside bid come in for the controlling shareholder.

4) Shareholder relationships

All past shareholders’ actions and behaviour needs to be considered from when dealing with one another. All businesses’ start off happy but over time can turn negative. If there are 5 shareholders each owning 20% and one shareholder has a large disagreement with the rest of the shareholders, his value might be discountable greater than the others due to the fact that his illiquidity has increased. 

5) Familial relationships

Usually, shareholders that are family will act in concert concerning the affairs of the corporation and thereby the size of the discount applied. CRA sets out their guidelines for family and group control in Information Circular 89-3 – Policy Statement on Business Equity Valuation. CRA has accepted that family members who jointly control a business can be assumed to act in concert regarding the corporate direction and liquidity of their investment. This could be a form of group control thereby wiping out the need for a minority discount. However, minority shareholders’ who are related to the family control group can have the option of being party to the family joint control group or not being party. This could allow the shareholder to claim a lower value for their shares as opposed to a higher value for capital gains/estate planning purposes.

6) Nuisance Value

Sometimes a minority shareholder could have what’s termed a “nuisance value” that makes their shares more valuable than they otherwise might be. This shareholder could prevent or delay corporate planning that the controlling shareholder wishes to engage in.  If the shareholder has an 11% stake, for example, they could prevent a mandatory acquisition squeeze out by a majority shareholder trying to purchase the entire company. This could be a nuisance for the majority shareholder.

7) Ability to sell your stake to other shareholders for control

If there are shareholders’ who don’t yet control the corporation, say only 40% shareholder, and by you selling your shares to them will let them obtain control, your discount could potentially be wiped out.

Each of the above factors play a role in determining the appropriate discount that will be applied to your minority shares. Had established law and jurisprudence been around 100 years ago, Couzens’ might not have had to report such a large gain on his tax return the following year.

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