Minority discount

Minority discount is an economic concept reflecting the notion that a partial ownership interest may be worth less than its proportional share of the total business.[1][2] The concept applies to equities with voting power because the size of voting position provides additional benefits or drawbacks. For example, ownership of a 51% share in the business is usually worth more than 51% of its equity value—this phenomenon is called the premium for control. Conversely, ownership of a 30% share in the business may be worth less than 30% of its equity value. This is so because this minority ownership limits the scope of control over critical aspects of the business. Share prices of public companies usually reflect the minority discount.[3] This is why take-private transactions involve a substantial premium over recently quoted prices.

## Contents

* 1 Properties of minority interest
* 2 Minority protection
* 3 See also
* 4 References
* 5 External links

## Properties of minority interest

On a per-share basis, buyers will pay less for minority interest versus a controlling or majority interest because a minority position strictly limits investors to make crucial business decisions. Below are some drawbacks penalizing minority shareholders.

* Minority owners do not manage the business.
* They cannot initiate a sale or liquidation of the business.
* They are limited to elect the company directors and to appoint its officers.
* They do not hire or fire employees.
* They do not declare and distribute dividends.
* They do not enter into contractual relationships with customers and suppliers.
* They do not raise debt or equity capital for the company.
* They do not approve strategy plans, mergers and acquisitions, or capital expenditures.

## Minority protection

The worse the minority shareholders' protection, the higher the minority discount. Nevertheless, minority owners may decrease the discount attached to their holdings. Some strategies to do so include inviting independent non-executive directors and shareholder activism. The activism can take several forms: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management.

## See also

* Associate company
* Business valuation
* Consolidation (business)
* Corporate governance
* Drag-along right
* Market for corporate control
* Minority interest
* Pre-emption right
* Tag-along right
* Voting interest

## References

1. ↑ "Minority Ownership Discount -- Definition". valuadder.com. http://www.valuadder.com/glossary/minority-ownership-interest-discount.html. Retrieved 2015-07-17.
2. ↑ "Valuation Issues - Valuation Discounts for Business Interests". investopedia.com. http://www.investopedia.com/exam-guide/cfp/valuation-issues/cfp3.asp. Retrieved 2015-07-17.
3. ↑ "Control Premiums, Minority Discounts, and Marketability Discounts". philipsaunders.com. http://www.philipsaunders.com/TheFirm/Publications/ControlPremiums/tabid/96/Default.aspx. Retrieved 2015-07-17.

## External links

* v
* t
* e

Corporate finance and investment banking

Capital structure|

* Convertible debt
* Exchangeable debt
* Mezzanine debt
* Pari passu
* Preferred equity
* Second lien debt
* Senior debt
* Senior secured debt
* Shareholder loan
* Stock
* Subordinated debt
* Warrant

Transactions
(terms/conditions)|

| Equity offerings|

* At-the-market offering
* Book building
* Bookrunner
* Bought deal
* Bought out deal
* Corporate spin-off
* Equity carve-out
* Follow-on offering
* Greenshoe
* Reverse
* Initial public offering
* Private placement
* Public offering
* Rights issue
* Seasoned equity offering
* Secondary market offering
* Underwriting

|

Mergers and
acquisitions|

* Buy side
* Control premium
* Demerger
* Divestment
* Drag-along right
* Management due diligence
* Managerial entrenchment
* Minority discount
* Pitch book
* Pre-emption right
* Proxy fight
* Post-merger integration
* Sell side
* Shareholder rights plan
* Special-purpose entity
* Special situation
* Squeeze-out
* Staggered board of directors
* Stock swap
* Super-majority amendment
* Tag-along right
* Takeover
* Reverse
* Tender offer

Leverage|

* Debt restructuring
* Debtor-in-possession financing
* Financial sponsor
* Leveraged buyout
* Leveraged recapitalization
* High-yield debt
* Private equity
* Project finance

Valuation|

* Accretion/dilution analysis
* Adjusted present value
* Associate company
* Business valuation
* Conglomerate discount
* Cost of capital
* Weighted average
* Discounted cash flow
* Economic value added
* Enterprise value
* Fairness opinion
* Financial modeling
* Free cash flow
* Free cash flow to equity
* Market value added
* Minority interest
* Modigliani–Miller theorem
* Net present value
* Pure play
* Real options
* Residual income
* Stock valuation
* Sum-of-the-parts analysis
* Tax shield
* Terminal value
* Valuation using multiples

* List of investment banks
* Outline of finance

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