“A lack of control discount is a reduction in the control value of the appraisal subject that is intended to reflect the fact that a minority stockholder cannot control the daily activities or policy decisions of an enterprise, leading to a reduction in value.”(Trugman)
Factors Influencing the Discount for Lack of Control
As with the discount for lack of marketability, an individual gifting a company wants to reduce the discount for lack of control. By doing so, the value of the interest in the company being gifted will increase and, consequently, so will the tax deduction. The following factors influence the discount for lack of control:
Control Prerogatives - By providing a minority interest with some of the control prerogatives shown below, the discount for lack of control will be reduced. Some examples include:
The ability to select and decide on levels of compensation for officers, directors and employees
The ability to decide with whom to do business and enter into binding contracts
The ability to decide whether to pay dividends and, if so, how much they should be
The ability to register stock with the Securities and Exchange Commission for a public offering
The ability to repurchase outstanding stock or issue new shares
The ability to make acquisitions or divest subsidiaries or divisions
The ability to buy, sell or hypothecate any or all company assets
The ability to determine capital expenditures
The ability to change the capital structure
The ability to amend the articles of incorporation or bylaws
The ability to sell a controlling interest in the company with or without participation by minority shareholders
The ability to determine policy, including changing the direction of the business
Having first rights of refusal
The ability to block any of the above
Less Than 100% - Any proportion of ownership less than 100% leaves room for attacks by minority shareholders on some prerogatives of control. The more prerogatives of control that a minority interest has (see list above), the smaller the discount for lack of control will be.
Supermajority Requirements - Even in states that do not have statutory requirements of supermajority votes for major corporate actions, any company may require supermajority votes for certain actions through its articles of incorporation or bylaws. If a block of stock constitutes control for certain actions, but is not large enough to be able to cause supermajority actions, it falls in-between a control value and a minority value. This results in a discount for lack of control, but not as large as the discount a minority interest would have.
Swing Vote Potential - Depending on the distribution of the stock, a block could have the potential to gain a premium price over a pure minority value because of its potential as a swing block. Many scenarios could be constructed where a swing block would have the potential to command some premium over a pure minority value. Thus, if the minority interest could swing an executive decision the minority interest is worth more than it normally would be, reducing the discount for lack of control.
Legal or Regulatory Constraints - Legal or regulatory conditions can prevent a control owner from exercising control prerogatives to the fullest extent. These conditions narrow the gap between control and minority value and reduce the discount for lack of control.
Fiduciary Duties - Sometimes controlling stockholders do not exercise all of the prerogatives of ownership control. This may occur when the controlling stockholder has a fiduciary or other special duty to the minority stockholders. In such cases, controlling stockholders and non-controlling stockholders could be treated equally with regard to economic benefits of equity ownership. In such instances, the lack of control discount is smaller than it otherwise would be.
Public Company Characteristic - Some privately held companies operate very much likely publicly owned companies. These characteristics may include: following accounting and legal formalities of public companies, having independent directors on their board, and providing full disclosure to all stockholders. In these instances, the lack of control discount is usually less than it would otherwise be.
Dissipated Control - When there are multiple minority owners, the lack of control discount is often less than it would otherwise be.
Summary
The average discount for lack of control falls in the 15-30% range.
Providing control prerogatives to the minority interest may be the best way to reduce the discount for lack of control.
