Minority Discount

QUESTION –
If I own a small interest in a property or business on the date of separation, do I get any discount from the value of my property when it is valued?

ANSWER
How the courts determine whether to allow a discount for a minority interest, or marketability restrictions, or both, and how much any discount should be, depends very much on the facts of each case. The courts have wide discretion. An expert opinion can be useful. As noted below, in F. v. V., 2002 CarswellOnt 4265, [2002] O.J. No. 3900 (S.C.J.), the court allowed a 40% discount on the value of shares in a situation similar to your client’s.

If a co-owner’s minority status does not prejudice him, no minority discount will be allowed. See Fitzpatrick v. Fitzpatrick, 2004 CarswellOnt 2606, 3 R.F.L. (6th) 325 (S.C.J.) at para. 29 — the husband owned 22% of the shares in the company. There were five shareholders, none of whom had more that 22% of the issued shares, so that at least three shareholders were required to make any major decisions.

Further, the severe restrictions on any Co-Owner disposing of her interest suggest that she is entitled to a marketability discount. See Ganson v. Ganson, 1996 CarswellOnt 4073, 17 O.T.C. 340 (Gen. Div.), at para. 46, on minority and marketability (or liquidity) discounts:

46 It is common when valuing the share of a party to Family Law litigation to apply a minority discount to an otherwise fair value of the shares being assessed. Although the discount is often referred to as a minority discount it is more frequently a combination of a minority discount based on a lack of control and a marketability discount which refers to the limited nature of the market in which the shares might be traded. Mr. Horvath gave evidence with respect to the reasons for minority/marketability discounts which I will refer to as a minority discount and also provided an analysis of minority discounts which have been applied in these types of cases.

(No discount to the value of the husband’s shares was allowed in Ganson because, although he was a minority shareholder, he was part of the control group.)

In Balcerzak v. Balcerzak, 1998 CarswellOnt 3785, 41 R.F.L. (4th) 13 (Gen. Div.), the value of the husband’s minority interest in the family business at DOS was discounted at the relatively low rate of 15% because the shareholders were a close family unit and all held similar minority interests. The same discount was applied to the value at DOM.

In F. v. V., 2002 CarswellOnt 4265, [2002] O.J. No. 3900 (S.C.J.). The wife in F. v. V. owned 200 of 1,000 common shares in a closely held company. The wife’s siblings, from whom she was largely estranged, held the other 800 common shares. Her father and a spousal trust held 1,999 voting Class A preferred shares. Her mother owned the remaining preferred share. The trial judge said, at paras. 60 and 62:

The issue before the court is the value of the Applicant’s 200 common shares in G.W.F. Ltd. In fact, she cannot transfer these shares unless she has the approval of the Board to a transfer. Her shares are not redeemable. She is not on and cannot control the Board. Nor is she an executor or trustee of the spousal trust established by her father’s will. As such, the issues of liquidity and lack of control are very real and should be considered.

The Applicant cannot control or direct the company. She cannot declare dividends or cause her shares to be redeemed or transferred. There is no viable market for her shares. The only potential purchaser might be another family member, and no evidence suggests this is even a possibility.

The court distinguished Balcerzak and applied a 40% combined minority and liquidity discount to the value of the applicant wife’s shares at DOM and DOS. See paras. 58-64.

In Stel-Van Homes Ltd. v. Fortini, 2006 CarswellOnt 3641, 21 B.L.R. (4th) 78 (S.C.J.), the husband’s one-sixth interest in a company whose other shareholders were members of his wife’s family. Litigation over the family businesses started after the death of the patriarch. Tomasone, the ex-husband of one of the daughters of the family, wanted the other shareholders to buy him out. Because of his disruptive conduct during the business and family litigation, which delayed resolution of the disputes over the business, a 20% discount for minority and marketability reasons was applied. See para. 28.

The court in Stel-Van Homes Ltd. v. Fortini referred to F. v. V. at paras. 21 and. 27:

21 Indeed, counsel for the Respondents referred to decisions in the matrimonial field that have added both a minority discount and a marketability discount to reflect the thinness of the market for shares of this nature. This goes above and beyond the few number of shareholders. See F. v. V., [2002] O.J. No. 3900 (Ont. S.C.J.); Nickerson v. Nickerson, [1983] N.S.J. No. 466 (N.S. T.D.).

27 The cases in minority discount do provide considerable discretion in the Court; in some cases such as Naneff v. Con-Crete Holdings Ltd. [1995 CarswellOnt 1207 (Ont. C.A.)], no minority discount was ordered. In others such as F. v. V. supra, discounts as high as 40% have been applied.