The Valuation Of A 50% Shareholding In A Closely Held Corporation

A shareholder owning 50 percent of the voting shares of a private corporation is neither a controlling shareholder nor a minority shareholder (in the true sense), absent any agreements, resolutions, articles, or bylaws that would otherwise provide de facto or de jure control. Although such shareholding lacks control and cannot elect the board, formulate policy, declare dividends, and make other corporate decisions — such as in the case of a 50 percent plus 1 voting position (giving the holder de jure control), it nevertheless has blocking power.

Consequently, absent a shareholders' agreement, discounts are often applied to the 50 percent pro-rata fair market value of the shareholding to reflect both lack of control and lack of marketability/illiquidity. The size of the minority discount and of the marketability discount will consider and reflect the following factors, as appropriate in the specific circumstances:

the terms of any shareholders' agreement, including the buy-sell covenant; the dispersion of the remaining shareholdings; the relationship subsisting between the 50 percent shareholder and the remaining shareholders; the relationships subsisting among the remaining shareholders and whether there are any voting blocks; the degree of harmony among the shareholders; size of each of the other shareholdings (e.g., 10 other shareholders each owning 5 percent of the shares as opposed to one other shareholder owning 50 percent); the blocking (veto) power of the 50 percent shareholding over corporate decisions; the ability to block a fundamental corporate change (liquidation, recapitalization, sale of all or substantially all of the company's assets, etc.), which requires two-thirds of the votes to approve a special resolution of the shareholders; the inability to proactively cause a corporate action to be taken; the extent to which the 50 percent shareholder has "operating" control; whether the 50 percent shareholder is a key person; whether the 50 percent shareholder is a significant creditor of the company; existence of call options, warrants, or rights; the expected length and/or uncertainty of the anticipated holding period; whether a court might view the shareholder relationship as joint tenancy, with the possibility of ordering a liquidation or corporate dissolution; whether there is an historical track record of dividends and/or other distributions; and if so, reasonable expectations that such payments would continue to be made; and...