Minority discount

Minority discount is an economic concept reflecting the notion that a partial ownership interest may be worth less than its proportional share of the total business. The concept applies to equities with voting power because the size of voting position provides additional benefits or drawbacks. For example, ownership of a 51% share in the business is usually worth more than 51% of its equity value—this phenomenon is called the premium for control. Conversely, ownership of a 30% share in the business may be worth less than 30% of its equity value. This is so because this minority ownership limits the scope of control over critical aspects of the business. Share prices of public companies usually reflect the minority discount. This is why take-private transactions involve a substantial premium over recently quoted prices.

On a per-share basis, buyers will pay less for minority interest versus a controlling or majority interest because a minority position strictly limits investors to make crucial business decisions. Below are some drawbacks penalizing minority shareholders.

Minority owners may still decrease the discount attached to their holdings. Some strategies include inviting independent non-executive directors and shareholder activism. The activism can take several forms: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management.

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