Abstract
This article aims at giving a contribution to the issue of valuating the minority discount for reduced powers in purchase/sale transactions of non-listed minority interests. Firstly, the meaning of minority discount for reduced powers will be investigated as well as its economic determinants, specifically pointing out that the economic rationale behind this type of minority discount lies in the impossibility for the minority purchaser to gain the prerogatives associated to a controlling position. Then the analysis will focus on the considered examination of the evaluation criteria of minority interests in businesses non-listed on official markets developed by main doctrine, at the same time singling out the salient and peculiar features thereof together with some comments and in-depth studies on the subject-matter. In this respect the main features of both direct and indirect valuation criteria will be analysed, specifically focusing on the second ones which measure the economic value of such minority interests by executing a discount percentage to the pro-rata value of the whole company’s economic capital (W). Finally the methods most often utilised by the European well-qualified professional praxis to measure the value of minority interests non-listed on regulated markets will be investigated. To this purpose, a number of official reports concerning purchase/sale transactions of minority interests in European non-listed companies will be examined. Finally, some conclusions on the topic at stake will be drawn.
Highlights
This research aims to give a contribution to the issue of valuating the minority discount for reduced powers in purchase/sale transactions of minority interests non-listed on official markets
We examine the principal features of both direct and indirect valuation criteria focusing on the second ones, which measure the financial value of minority interests by executing a discount percentage to the corresponding economic base value
On the basis of the aforementioned data it seems clear that the most (56%) used criterion by European praxis to measure the market value of minority interests in companies non-listed on official markets is the Mercer Capital Methodology, which belongs to the category of indirect criteria and, as previously mentioned, deducts the discount rate to be applied to the minority interests base value from the magnitude of control premium rates applied in past purchase/sale transactions of majority holdings in comparable companies
Summary
With specific regard to the prerogatives associated with the interest in the corporate capital that is being negotiated, when it provides the purchaser relevant control rights upon the company, or is useless for this purpose, a discrepancy can be discovered within the financial value of the exchanged interest and the correlative pro-rated value of the economic capital (i.e. base or found value). This divergence aims to provide a fair assessment to the further control requirement, when it occurs or when it is absent. Such percentage reduction is called “minority discount for reduced powers” or “minority discount for lack of control”
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