inthefirm,whereyoupresumablycanaffectcontrol,youare
in a position to alter both the likelihood of management
changingandhowitwillbechanged(andthusthevalueof
change).Consequently,theexpectedvalueofcontroltoyou
asa largeblockstockholdermaybe muchhigherthanthe
market’sassessmentandwilltranslateintoapremiumforthe
block.Onceyouacquiretheblock,thesmallstockholdersin
the firm will be able to piggyback on your success at
changing the way the company is run and share in the
increased value.
Implications
Thereareseveralimplicationstokeepinmindwithregardto
minority discounts and control premiums:
- The minority discount should vary inversely with
managementquality.Iftheminoritydiscountreflects
thevalue ofcontrol (orlack thereof),it shouldbe
largerforfirms thatarepoorly runandsmaller for
well-runfirms.Aswithcontrolpremiums,thereisno
simpleruleofthumbthatcanbeappliedtominority
discounts. - Controlmaynotalwaysrequire 51 percent.Whileit
is true that you need 51 percent of the equity to
exercisecontrolofaprivatefirmwhenyouhaveonly
twoco-owners,itispossibletoeffectivelycontrola
firm with a smaller proportion of the outstanding
stockwhenequityisdispersedamongmoreinvestors.
Infact,aninvestormaybeeffectivelyabletocontrol
afirmwithonly 35 percentoftheoutstandingequity
iftherearemultipleinvestorsintheprivatefirm,and
the minority discount may not materialize until