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Business Valuation and Federal Taxes: Procedure, Law and Perspective, 2nd Edition by Shannon P. Pratt, David Laro

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Chapter 19

Minority Discounts/Control Premiums

Summary

A shareholder-level discount or premium is one that affects only a defined group of shareholders rather than the whole company. Discounts for lack of marketability and other shareholder-level discounts should be applied to the net amount after entity-level discounts, if any.

Minority Discounts/Control Premiums

Minority discounts are often (and more properly) referred to as lack of control discounts because it is possible to have a majority interest and still not have control, and, conversely, a minority interest may have control, perhaps because of voting trusts and other arrangements. For example, on one hand, no limited partner has control, regardless of the percentage interest. On the other hand, in Estate of Hendrickson v. Commissioner,1 a 49.99 percent interest was deemed by the court to constitute control because the balance of the stock was divided among 29 small stockholders.

After marketability, minority/control is the next most frequent issue in disputed valuations. Virtually everyone recognizes that, in most cases, control shares are worth more than minority shares. However, there is little consensus on how to measure the difference. As with lack of marketability, lack of control is not a black-and-white issue, but covers a spectrum:

  • 100 percent control
  • Less than 100 percent interest
  • Less than supermajority where state statutes or articles of incorporation require supermajority for certain actions
  • 50/50 interest ...

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