A recent decision of the Supreme Court explains the principles for assessing the value of a shareholding in a company. The Court analysed a problem that emerged in conjunction with a decrease in the value of a pledged share upon a change in share capital and explicitly confirmed the common understanding in business practice – the value of a shareholding is also influenced by attached voting rights.
In this case, the sole share of a company was pledged in favour of the pledge. Later, the pledgor decided to reduce and then increase the share capital of the company. As a result, the pledgor was no longer sole shareholder but instead held a 25% shareholding in the company. The Supreme Court found that the reduction and increase of share capital damaged the interests of the pledgee, as the value of the pledged object decreased significantly. According to the explanations of the court, the percentage of a shareholding directly influences its value. Here the Court mainly meant that important issues cannot be decided, or deciding on them cannot be blocked, by a smaller shareholding percentage, i.e. explicitly referring to the impact of voting rights in assessing the value of a shareholding.
Thus, the court established that the value of a shareholding is not only related to the right to receive dividends or other payments according to the size of the shareholding, but that other important circumstances should also be taken into consideration, including related voting rights. A 51% shareholding in a company is generally more valuable than a 49% shareholding, mainly for the reason that it allows adoption of many resolutions without the consent of the other party and for organisation of the company’s activities as desired – for example, to elect members of the managing body or decide on distribution of dividends. It may be often more important for a shareholder to have control over management than to receive a few percent more in dividends.
Although the Court has confirmed the impact of voting rights on the value of a shareholding, the amount is calculated on the basis of each particular case, also taking into account other significant matters. On the other hand, the numerical value might not always be important, as also demonstrated by the given court case: the pledgor had to notify the pledgee of a decrease in the value of its shareholding as an event damaging the interests of the pledgee, and violation of that obligation resulted in a demand for contractual penalty of over EEK 10 million.
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Supreme Court explicitly confirms impact of voting rights on value of shareholding
A recent decision of the Supreme Court explains the principles for assessing the value of a shareholding in a company. The Court analysed a problem that emerged in conjunction with a decrease in the value of a pledged share upon a change in share capital and explicitly confirmed the common understanding in business practice – the value of a shareholding is also influenced by attached voting rights.
In this case, the sole share of a company was pledged in favour of the pledge. Later, the pledgor decided to reduce and then increase the share capital of the company. As a result, the pledgor was no longer sole shareholder but instead held a 25% shareholding in the company. The Supreme Court found that the reduction and increase of share capital damaged the interests of the pledgee, as the value of the pledged object decreased significantly. According to the explanations of the court, the percentage of a shareholding directly influences its value. Here the Court mainly meant that important issues cannot be decided, or deciding on them cannot be blocked, by a smaller shareholding percentage, i.e. explicitly referring to the impact of voting rights in assessing the value of a shareholding.
Thus, the court established that the value of a shareholding is not only related to the right to receive dividends or other payments according to the size of the shareholding, but that other important circumstances should also be taken into consideration, including related voting rights. A 51% shareholding in a company is generally more valuable than a 49% shareholding, mainly for the reason that it allows adoption of many resolutions without the consent of the other party and for organisation of the company’s activities as desired – for example, to elect members of the managing body or decide on distribution of dividends. It may be often more important for a shareholder to have control over management than to receive a few percent more in dividends.
Although the Court has confirmed the impact of voting rights on the value of a shareholding, the amount is calculated on the basis of each particular case, also taking into account other significant matters. On the other hand, the numerical value might not always be important, as also demonstrated by the given court case: the pledgor had to notify the pledgee of a decrease in the value of its shareholding as an event damaging the interests of the pledgee, and violation of that obligation resulted in a demand for contractual penalty of over EEK 10 million.