The Federal Court has explained that a key factor in determining whether or not the market value of a minority shareholding should incorporate a discount for lack of control1 is whether the sale of the shareholding was part of a larger transaction by which the purchaser gained control of the company.
Three equal shareholders in AJM Environmental Services Pty Ltd (AJM), of which Mr Miley was one, agreed to sell their shares to an arm’s length purchaser (EIMCO) for $17.7 million, with each shareholder receiving $5.9 million.
On the Commissioner of Taxation’s view that the market value of Mr Miley’s shareholding immediately before the sale was $5.9 million, it followed that Mr Miley’s total CGT assets at that point in time exceeded a statutory threshold of $6 million and he was therefore not entitled to certain small business CGT concessions.
At first instance, Mr Miley successfully challenged the Commissioner’s assessment with the AAT finding that the market value of the relevant shareholding was $4,914,700, after applying a discount for lack of control of 16.7%. The AAT’s approach was to determine market value of the minority shareholding on a standalone basis, as though the purchaser had only acquired Mr Miley’s shares.
The Commissioner appealed to the Federal Court.
Justice Wigney found in favour of the Commissioner, holding that, since EIMCO had agreed to purchase all of the AJM shares and would never be in the position of a minority shareholder:
Justice Wigney distinguished cases in which the "holder or purchaser of the shares was unable to acquire the remaining shares in the company, or at least further shares that would convert the holding into a controlling holding”, where discounts for lack of control have been applied.
Read the full judgment here.
 The International Valuation Standards Council defines discount for lack of control as “an amount or percentage deducted from a pro-rata share of the value of 100 percent of an equity interest in a business, to reflect the absence of some or all of the powers of control”. The underlying concept is that, all other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control.
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