Writing for the UK200Group, BKL corporate finance partner Daniel Shear examines how the recent case of Foulser & Foulser v HMRC may affect the level of discounts applied in valuing minority shareholdings in companies.
An interesting aspect of the case of Foulser & Foulser v HMRC
was the level of discounts to be applied in valuing minority
shareholdings in companies. The case itself focussed on other
matters, but the continuation hearing held earlier this year dealt
with determining the market value of a 51% and a 9%
shareholding in a private company.
Experts for both sides suggested very different valuations (£6.0m
and £17.5m for the 51% shareholding, £0.2m and £2.1m for the
9%) and the court decided to go back to first principles in
selecting a suitable valuation methodology. As a result, the court
determined an entirety (whole company) value of £39.0m.
Discount for a 51% shareholding
HMRC’s expert suggested a 15% discount, based on a range of
10% for mature companies to 15% for expanding companies.
The claimants’ expert suggested a 20% discount, based on a
range of 20% to 25%, due to the specific facts of the case –
there was a 40% shareholder who had effectively prevented a
previous proposed disposal. The court decided to apply a 20%
discount, pretty much following the approach of the claimants’
Minority Discount for a 9% shareholding
The claimants’ expert did not suggest any discount as he had
valued this parcel of shares on a dividend yield basis. HMRC’s
expert suggested a 40% discount based on a ‘normal’ discount
for a shareholding of this size of 50%, but reduced by the facts
of the case (essentially that the company was in expansion phase
and had received bid approaches). The court decided to apply a
50% discount, based on the latter expert’s asserted normal level,
without further adjustment as these factors had been taken into
account in arriving at a suitable valuation multiple.
Obviously the facts of each case are unique and a ‘one size fits all’
minority discount can’t be deduced from this case alone.
However, as a rule of thumb, and ignoring the specific facts of
the case, I would have suggested that a 20% discount is
generous for a majority shareholder. I would also have
suggested a 50% discount for a 9% shareholder is on the low
side and certainly would not have suggested this is the ‘norm’.
It will be interesting to see the extent to which this case is
referred to on the level of minority discounting (though being a
first-tier tribunal case the decision does not constitute a legally
binding precedent) or whether another case with completely
different facts will go to court, resulting in a different range of
minority discounts being determined.