Our article “Fair Value of Minority Shares in a Closely Held Company” published in the December 2018 issue of the New Zealand Business Law Quarterly examines the New Zealand law and judicial decisions on the notion of fair value for minority shares. Specifically, the article focuses on a closely held or unlisted company and considers whether fair value of a minority stake should incorporate a discount from the pro rata value of the company’s equity considered as a whole.
In general, the universal principle is that fair value has to be equitable to the acquirer and the vendor, recognizing what the seller gives up in value and what the buyer receives through the share acquisition. However, in New Zealand, fair value is not a single valuation standard but a contextual assessment. The context and applicable constitutional New Zealand Companies Act requirements influence whether a discount ought to apply in determining the fair value for minority shares.
While the baseline position is that fair value may include a discount for minority interest there are contexts in New Zealand in which a discount would not apply. One is where a company’s constitution prescribes a formula to determine fair value and this is a pro rata value of the total value. Where a company’s constitution provides for an expert to determine fair value without being explicit on whether a discount applies, then the expert will have discretion in the decision.
In cases where directors are dealing in shares and have material inside information, section 149 of the New Zealand Companies Act of 1993 is relevant, and court decisions suggest a nuanced approach to the question of whether a minority discount applies. A minority discount may apply where the transaction is an open market consensual transaction and information relevant to the value of the shares has been disclosed. However, no discount is likely to apply in the case of a closely held company where shareholders have fallen out, or where the company constitution gives a minority greater than usual rights.
The New Zealand Companies Act of 1993 also considers fair value where minority buyout rights apply, and where a shareholder is oppressed, unfairly discriminated against, or unfairly prejudged. The Companies Act of 1993 and the court decisions typically conclude that fair value in these contexts is a pro rata value exclusive of a discount for minority shares.
These contextual applications aim to minimize positional bias and information asymmetry among specified participants.