4.4.7.3 Discount

It is understandable and generally accepted that the value of minority share-holdings is subject to discount because minority shareholding usually means limited voting power and accordingly limited impact on the management of the business. But in the unfair prejudice remedy, though the legislation does not stipulate how the matter is to be approached, most, if not all, authorities hold that where the company is or is alleged to be a quasi-partnership, the petition should be valued on a pro-rata basis and no discount allowed.1 In a recent case, Irvine v. Irvine, the court was asked to decide whether in the drafting of the buyout order the 49.96% shareholding (as it is effectively) is to be valued on a pro rata or discounted basis to reflect the fact that it is a minority holding. The judge reasoned: short of a quasi-partnership or some other exceptional circumstances, there is no reason to accord to it a quality which it lacks.2 Consequently, a quasi-partnership is the precondition to exclude the possibility of discount.

In Strahan v. Wilcock,3 the way to determine the existence of a "quasi-partnership" is deemed to depend on whether the relationship as described in Ebrahimi has been formed or developed.4 The elements of a quasi-partnership Ebrahimi are: (i) An association formed or continued on the basis of a personal relationship, involving mutual confidence. (ii) An agreement, or understanding, that all, or some (in case there are "sleeping" members), of the shareholders shall participate in the conduct of the business. (iii) Restriction upon the transfer of the members' interest in the company. These three elements are indicative but not exhaustive.5 By approving the features of quasi-partnership, it is thus expected that the prime concern in deciding on discount is whether the minority shareholder holds his shares purely as a form of investment, or he participates in the conduct of the affairs of the company.6 So the line is drawn between passive investment only or management. Courts should also take into account the switch between these two intentions: investment may change to management, and management may change to investment only, as in the situation after generations in an original quasi-partnership. In that case, a discount should be applied.7

One exception to the no discount practice has been established by case law, i.e., the petitioner's misconduct. In Re Bird Precision Bellows Ltd, a shareholder accounted for his exclusion by taking a constructive decision to sever his connection with the company, which led to the breakdown of good relations between them. Accordingly, a discount was granted in this case.8 The position taken in this case by the court of appeal was later adopted by Irvine, which is: that is [a valuation on a non-discounted basis], in general, the fair basis of valuation in a quasi-partnership case, and that it should be applied in this case unless the respondents have established that the petitioners acted in such a way as to deserve their exclusion from the company.9 In brief, the pro rata basis is widely accepted and applied.