Compulsory share transfers – should there be a minority discount?

The High Court has considered whether a minority discount should be applied when a shareholding is to be sold pursuant to compulsory transfer provisions.

Mr Monaghan and Mr Gilsenan were shareholders in Euro Accessories Ltd, a company which supplied accessories to customers manufacturing products from concrete. Mr Monaghan, who was employed by the company as a sales representative, held 24.99% of the shares in the company, and Mr Gilsenan held the remaining shares.

The relationship between Mr Gilsenan and Mr Monaghan broke down, and Mr Monaghan resigned from the company. There were negotiations between them for the purchase of Mr Monaghan’s shares by Mr Gilsenan, but no agreement was reached as to the price to be paid.

Eventually, Mr Gilsenan, as the holder of 75.01% of the shares, passed a special resolution amending the company’s articles of association. The amendment redesignated Mr Gilsenan’s shares as A shares and Mr Monaghan’s shares as B shares and provided that the A shareholder could serve an option notice on the B shareholder requiring the B shareholder to transfer all his shares to the A shareholder at fair value.

Mr Gilsenan served an option notice and sent Mr Monaghan a cheque for £175,000, which he considered to be the fair value of the shares. Mr Monaghan did not cash the cheque, but brought a petition under section 994 of the Companies Act 2006, arguing that his shares had been expropriated for less than fair value, because a minority discount had been applied to the purchase price.

A jointly instructed expert considered that the value of the company was £2.18 million, so that on a pro rata basis Mr Monaghan’s 24.99% shareholding was worth £545,000. If, on the other hand, a minority discount should be applied, that figure should be reduced by 55% to £245,000.

The issue for the court was whether a minority discount should be applied or not. Snowden J held that the purpose of the amendment to the articles was to give the majority shareholder an option requiring the minority shareholder to sell his shares to him. The requirement that the consideration for the shares would be their fair value focused on ‘the value of the identified property owned by the minority shareholder which is to be transferred under the option’. In Shanda Games Ltd v Maso Capital Investments Ltd [2020] UKPC 2, the Privy Council had held that, unless there was some indication to the contrary, the shares of a minority shareholder should be valued as a minority shareholding and not on a pro rata basis.

Applying the principles set out in the Shanda Games case, Snowden J held that, since what must be given a fair value is what is being compulsorily transferred, a minority shareholder ‘cannot insist on being paid by the transferee for something to which his shares do not entitle him and that he does not own. He therefore cannot insist on payment for a proportionate part of the controlling stake which the acquirer thereby builds up, or a pro rata part of the value of the company’s net assets or business undertaking.’

There was no reason to take any equitable factors into account, since the amended articles provided that the shares should be valued objectively, with no indication that any discretion should be exercised, or that the relationship between the parties should be considered. Accordingly, Snowden J declared that the fair value of Mr Monaghan’s shares was £245,000, taking into account the minority discount.

This case is a useful reminder that, unless there is provision to the contrary, the courts will normally apply a minority discount when determining the fair value of a minority shareholding that is to be compulsorily transferred. If it is intended that no minority discount should be applied, it would be advisable to make explicit provision that fair value is to be determined by valuing the shares pro rata.

Click here to read the full judgment.

For more information, please contact Brendan Biggs in our Corporate team.