Minority discount (décote de minorité)

Holding 20 % of an SCI (société civile immobilière, a French property-holding company) is not the same as holding 20 % of the building with the powers that go with it. The minority shareholder can neither decide to sell, nor force a distribution, nor remove the manager without the support of the others. His shares are therefore worth less, proportionally, than those of a shareholder who controls the company. The minority discount expresses that difference, the mirror image of the control premium that a majority block may justify.

It is added to the illiquidity discount but is not the same thing: the first concerns power, the second the ability to sell. The two may be combined when they rest on distinct facts, as the Cour de cassation has accepted, provided the same drawback is not compensated twice.

Where the rule comes from

The French Civil Code leaves it to the articles of association to set the majority rules of civil companies; failing that, decisions beyond the manager’s powers are taken unanimously (articles 1852 and 1853). It is in the articles that the degree of control attached to a holding is read. For tax purposes, the discount rests on the real market value of article 666 of the French General Tax Code, and the tax authority accepts it in its valuation guides, subject to justification.

Where a clause in the articles fixes the method for valuing the shares, the expert appointed under article 1843-4 of the French Civil Code must apply it, which may exclude or limit any discount.

In a valuation report

I examine the distribution of the capital and the majorities required for each type of decision: day-to-day management, sale of a building, amendment of the articles, approval of a new shareholder. A 34 % holding in a company where important decisions require a two-thirds majority confers a blocking minority and justifies a smaller discount than a 10 % holding. I also take into account the position of manager, family ties and the existence of a shareholders’ agreement. The rate adopted, often between 10 % and 25 %, is explained and kept distinct from illiquidity.

Example

An SCI owns two buildings for a restated net asset value of €1,500,000, split between one shareholder at 70 %, who is the manager, and two shareholders at 15 % each. The articles provide that the sale of a building is decided by a majority of the shares. For a gift, the shares of a 15 % shareholder are valued: pro rata share €225,000, illiquidity discount 10 % (€22,500), then minority discount 15 % on the balance (€30,375), giving €172,125. The shares of the 70 % shareholder would bear only the illiquidity discount.

Not to be confused with

The illiquidity discount, based on the difficulty of transferring the shares, and the discount for joint ownership, reserved for undivided shares in a property held in indivision.