Company directors purchase of shares from other shareholders are required to be at “fair value”. A discount to the price may be appropriate where shareholders bought out hold a minority interest, but this is unlikely where it is a closely-held company.
Multiple court hearings followed inter-generational dissension within an Asian family about future direction for their companies: a son-in law wanted to borrow heavily for further expansion; his father-in-law didn’t. To avoid an impasse it was agreed that the older generation would buy out the younger generation, leaving them cashed up to pursue their own interests, with a debt of $500,000 owed to the father-in-law to be deducted from the price paid.
Pave Capital Ltd held their collective investment interests, with the younger generation holding a 32 per cent interest. A buy-out valuation could not be agreed.
Company law requires the father-in-law as a director of Pave Capital to pay “fair value” when buying out other shareholders.
The father-in-law argued that normal valuation principles should be applied to establish fair value: the minority holding should be reduced in value because the younger generation’s 32 per cent shareholding did not give any measure of voting control.
The court did not agree. This was a closely-held family company with a small number of shareholders: it operated like a partnership. In these cases, no minority discount should be applied.
Without a minority discount, the younger generation’s shareholding is worth more – estimated at an extra $600,000.
Fong v. Wong – Supreme Court (13.12.10) & Court of Appeal (16.07.10)