Control premium and minority discount

Both terms deal with the gap between a controlling and a noncontrolling interest. CBV Institute defines a control premium as the amount by which the pro rata value of a controlling interest exceeds the pro rata value of a noncontrolling interest, reflecting the anticipated economic benefits of control. A noncontrolling interest is also called a minority interest.

How the discount is described

CBV Institute defines a discount for lack of control as an amount deducted from the pro rata share of the whole equity value, when that whole is valued on a controlling basis, to reflect the absence of some or all of the economic benefits of control. The Canada Revenue Agency’s Information Circular 89-3 lists control or minority shareholder interests among the factors for valuing a specific shareholding. It also says that where it is satisfied that the documentation provided indicates a consistent pattern of group control, it will apply a rateable valuation to each member’s shares and not apply a minority discount. See business valuation methods compared.

What to check or ask

• Whether a valuation is on a controlling or a noncontrolling basis
• What rights the shares carry under the articles and any shareholder agreement
• Whether a related group of shareholders acts together