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Valuing B Class Shares

I am attempting to value a minority "B Class" share holding in a business

I am attempting to value an 11.42% shareholding in a business, but the shareholding in question is held in "B Class Shares".

These shares rank Parri Passu with the ordinary "A Shares" which are in issue save for the following:

1. There is no entitlement to dividends on B shares when they are declared on A shares

2. There are restrictions within the company's articles which cover the possible transfer of B shares (They must first be offered to other B class holders, followed by A and then to the company itself before any third party)

These restrictions also allow the controlling parties to refuse to register any transfer of B shares so long as they do so in the interest of the company.

Summary

Having already arrived at a 60% discount on the shares which relates to the holding being an 11.42% minority share, should any further discount be applied to recognise the fact that the specific shares in question are "B Class Shares", and in addition, have restrictions within the articles as mentioned above?

 

 

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By tom123
08th Feb 2019 14:25

Are you valuing for the buyer or the seller?

Don't seem hugely valuable to me, if I were to be the recipient - especially if I had paid or forfeited something for them like salary.

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to tom123
08th Feb 2019 14:44

I am valuing as both the buyer and the seller as odd as that may sound.

I had a 22.84% holding in the company I work for which was transferred to me some years ago via an EMI scheme.
I later transfered 50% of this holding to my (Soon to be ex wife), and we are now attempting to value the shares for this purpose.

These shares would not be likely to attract a buyer for obvious reasons (Who would buy a minority share in a company where there would not receive dividends and may well not be able to sell the shares on at a later date due to the restrictions).

The main question here which i am struggling to nail down, is how to arrive at an appropriate discount on the overarching share value to account for the shares being a "B Class of share".

The 60% i refer to is simply to reflect the holding is only a minority holding of 11.42%.

Hope this helps

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08th Feb 2019 14:40

You say that there is no entitlement to a dividend when a dividend is declared on the A shares. Does that mean that they have no entitlement to dividends at all? If so, then I would say that a further discount would indeed be appropriate to reflect that and the other restrictions.

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to Wilson Philips
08th Feb 2019 14:48

The controlling parties (founders who still own 78.16% of the company) being 100% of the "A Shares", decide themselves what dividends are declared and on which class of shares and at what level.
Effectively, The B Shares have no automatic rights to dividend payments whatsoever.

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to Mr Kevin Hubbard
08th Feb 2019 14:57

But, from what you say, the A shares have no automatic rights to dividends either. Although past dividend history is usually taken into account, the fact that no dividends have been paid on the B shares should, in theory at least, carry a different discount to that if there were no dividend entitlement at all.

I can't tell you what the appropriate discount should be - invariably one party will be seeking a higher value and the other a lower. The best that you can do is come up with a justifiable figure and be prepared to negotiate.

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08th Feb 2019 14:42

If value = NPV of future cashflows, and those cashflows are entirely at the mercy of the majority shareholders, then the valuation is close to nil

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to WhichTyler
08th Feb 2019 14:51

I would tend to agree, but I can find no similar examples to use as reference where B shares with such restrictions have been valued. The easy bit is to attribute a 60% discount relating to the size of the holding (11.42%), the hard part is demonstrating why a further discount is appropriate to recognise the lack of dividends and readability of the B shares give the restriction on transfer-ability.

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to Mr Kevin Hubbard
08th Feb 2019 15:02

Quote:

I would tend to agree, but I can find no similar examples to use as reference where B shares with such restrictions have been valued. The easy bit is to attribute a 60% discount relating to the size of the holding (11.42%), the hard part is demonstrating why a further discount is appropriate to recognise the lack of dividends and readability of the B shares give the restriction on transfer-ability.


It would be just as easy to attribute a 70% discount for the size of the holding.

The hard part is not in demonstrating why a further discount is appropriate - the hard part is establishing the size of that discount. Any share that has a demonstrable track record of having no dividends and that has restrictions on transfer will undoubtedly be worth less than a share that is regularly subject to dividends and which can be freely transferred.

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to Wilson Philips
08th Feb 2019 15:44

Again, I absolutely agree.
Are you aware of any similar cases where a differing level of discount has been applied to an inferior class of share to the main ordinary A shares?

I really need a point of reference if possible.

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08th Feb 2019 15:17

So they have no right to dividends, and you can't sell them?

I know how much I'd be prepared to pay.

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08th Feb 2019 15:30

I would be inclined to say they're worthless.

Is the company the type of company that exists as a vehicle for the directors to work in their trade? Would there be anything stopping the directors/A shareholders paying out all of the reserves as dividends and winding up the company, just to start again with a new company?

If so that would clinch it for me, though even if not, if you offered me £10 or the 11.42% shareholding I'd take the £10.

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to Duggimon
08th Feb 2019 15:37

Quote:

If so that would clinch it for me, though even if not, if you offered me £10 or the 11.42% shareholding I'd take the £10.


Would your answer be the same if the shares had no dividend rights, no freedom of transfer but fully participated in the assets of the company, which is worth £10m?

On the face of it, the shares in this case might well be worth next to nothing, based on certain assumptions, but in absence of ALL of the facts I don't see how anyone here can come up with anything like a conclusive opinion of value.

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to Wilson Philips
08th Feb 2019 15:52

11.42% of nothing is nothing. If I have no way of taking money from the company, and one of the directors deciding whether I get anything from the company is my ex husband then it doesn't matter if it owns the moon, my shares aren't worth anything.

If your client came to you and said they'd been offered a 11.42% shareholding in a company, but they had no rights to dividends, no freedom of transfer, no guarantee or even likelihood of getting any sort of return on their investment, all they would get from it is a bit of paper saying they owned a non-transferable stake worth £1.142 million that they are unable to realise in any sort of way, how much would you advise they invest? I'd tell them not to.

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to Duggimon
08th Feb 2019 16:14

If I was offered a tenner or a share that entitled me to 11% of the sale proceeds of a company currently valued at £12m (albeit with no prospect of sale in sight) I know which one I'd choose!

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to Wilson Philips
08th Feb 2019 16:21

And I bet you thought it was a good move when the Lottery switched from £10 prizes to lucky dips, after all a lucky dip could be worth millions!

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to Wilson Philips
08th Feb 2019 15:52

It's worth noting that an asset based valuation has produced a total value for the company (as a whole) at Around £12m. EBITDA of just over £2m.

An earnings based valuation would have arrived at around £2m less (at approx £10m) as the company's recent performance has been poor along with its future prospects.

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to Duggimon
08th Feb 2019 15:49

The shares have been used as a vehicle by which the owners (A Share Holders) and me (The MD) have been able to draw income.

No Dividends have been declared on the B shares (My shares) for several years as the company isn't performing particularly well at the moment (Retail) and so my salary is now fixed and i'm remunerated via PAYE.

To answer your question, No, there would be nothing stopping the controlling A Share holders from pulling all of the reserves and winding up the company. The B share holders shares (even combined @ 22.84%), do not represent enough to have any voice in that whatsoever.

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to Mr Kevin Hubbard
08th Feb 2019 16:14

So the B shareholders only 'fully participate in the assets of the company' at the complete discretion of the A shareholders?

Looking at it another way, how much are you willing to pay your soon to be ex-wife for these shares? If you think they are worth 60% of £1.142m, then offer £600k and see what she says... If she accepts then everyone is happy...

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to Mr Kevin Hubbard
08th Feb 2019 16:18

Quote:
The B share holders shares (even combined @ 22.84%), do not represent enough to have any voice in that whatsoever.

It's messy, and limited in its application, with no guarantee of success but there is the concept of unfair prejudice of minority interests.
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By raycad
to Mr Kevin Hubbard
13th Feb 2019 11:58

Whilst there has been an interesting (if not terribly illuminating) debate in this forum about the valuation of minority shareholdings in a private company, I think, with respect, quite a bit of this has been rather "off-piste". The original query was:

"...should any further discount be applied to recognise the fact that the specific shares in question are "B Class Shares?"

The answer is, quite simply, No. The B shares rank pari passu with the A shares and so would not be valued any differently to the A shares. The actual class of the share is irrelevant; only the underlying rights matter.

Apart from preference shares, no shares carry an automatic right to dividends and, personally, and especially given the size of the holdings in question, I do not see that the dividend history would carry much (if any) weight in a share valuation.

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By DJKL
08th Feb 2019 16:52

The valuation appears to be a factor of the B shares existence being an annoyance factor to the A Share holders in the event the latter wished to wind up the company and not have the B share holders participate in same, they have first dibs on them if the B holders were to sell but the B holders have a quasi "ransom strip" vis a vis the A holders in that particular circumstance.

Accordingly the only willing buyers might be the A shareholders but only if winding up rather than dividends was beneficial to them.

How you value this, no idea, but it does appear to be the only basis of applying any value.

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By itp3e
13th Feb 2019 12:27

what ever possessed you to acceot to receive this seventh circle of hell in the first place?

I would've just asked for the equivalent in options vesting in two years time . with some luck you would be in the money by now

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14th Feb 2019 11:01

What seems to be the net result to the question is none to we have no idea.

Have you tried contacting a share valuation specailist? Whilst this would cost money, it could be less that the Lawyers fees when arguing valuation with your spouse.

I would be most grateful if once the price is settled please do post again and let us all know what was agreed and why. Thank you

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