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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 21

Other Shareholder-Level Discounts

Summary

A shareholder-level discount or premium is one that affects only a defined group of shareholders rather than the whole company. As with discounts for lack of marketability, other shareholder-level discounts should be applied to the net amount after entity-level discount, if any. Other shareholder level discounts include voting versus nonvoting shares, blockage, and discounts for undivided fractional interests.

Voting versus Nonvoting Shares

In most instances, where there are large numbers of voting and nonvoting shares, the difference in value is quite small because the minority interests in the voting shares can have little impact on the control of the company. Empirical studies of voting versus nonvoting shares in the public markets in the United States have shown differences of 2 percent to 7 percent between the voting and nonvoting classes.1 A study of the Toronto Stock Exchange showed similar results.2

By contrast, where a small number of shares are voting versus a very large number that are nonvoting, a block of voting shares that has the power to control the company is worth considerably more than the nonvoting shares. Studies have shown that the value of a single block of voting stock that controls the company can be worth 10 percent or more of the entire value of the company.3

In Estate of Simplot, the decedent owned a minority interest in a small control block of stock. Expert witnesses for both the estate and the ...

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