In a recent decision, the Ontario Superior Court of Justice has held that where majority shareholders are ordered to purchase all the shares of the minority shareholders, a minority discount should not be applied to reduce the purchase price for the shares.
In Pilch et al v. TemboSocial Inc. et al, 2014 ONSC 5590 (SCJ), the applicants, Mr. Pilch and his wife, owned 25 per cent of the company and the majority shareholder respondents owned the remaining 75 per cent. When the company dismissed Mr. Pilch, he and his wife brought an oppression application against the majority shareholders.
To resolve the oppression application, the majority shareholders agreed to a Consent Order requiring them to purchase all of the shares of the minority shareholders, Mr. and Mrs. Pilch, at a purchase price to be determined by the Court.
At the trial of the issue to determine the purchase price for the shares, the majority shareholders argued that a minority discount of 25% should be applied to the valuation of the shares to be purchased from Mr. and Mrs. Pilch, because they were minority shareholders. A minority discount is often applied to reduce the price of minority shares when they are sold on the open market; the rationale being that the shares are less valuable because they do not represent control of the company.
However, the Court did not agree, finding that where a court directs the compulsory purchase of shares by existing shareholders who thereby consolidate their existing shareholdings - such as a compulsory purchase under the oppression remedy – the rationale for a minority discount does not apply.
The Court adopted the approach to the valuation of shares in a compulsory purchase situation used in Diligenti v. RWMD Operations Kelowna Ltd. (No. 2),  B.C.J. No. 1331, 4 B.C.L.R. 134 (S.C.), in which the British Columbia Supreme Court held as follows:
[W]hile it is true that in the process of the initial step – determination of the value of the business as a going concern – one must look at what a willing purchaser would be prepared to pay a willing vendor for that business on the open market, in the second step – determination of the actual price for the shares, the situation here is quite different from that of a minority shareholder offering his shares on the open market… [H]ere, where the purchase will be by virtue of an order that existing shareholders, or the company, make the purchase, the result will be that existing shareholders will simply consolidate their positions…
Second, and more important, I hold that the law as it has developed in connection with the fixing of the price for shares in situations such as this makes it clear that what the court is concerned with is not the market value of the shares, but with the fair market value or price to be set in the circumstances[.]
This is not an arid distinction, but a real one which recognizes and gives effect to the particular situation where there has been oppressive or unfair conduct which justifies an order that the shares of the minority be purchased by the majority or the company. Again it is true that the first step in valuation is to determine the value of the business, so far as is possible to do so, on the basis of estimated market value. But when it comes to determining the price to be paid for the shares in these circumstances, the test is not market value of those shares – where a minority discount would apply – but what price is fair in the circumstances.
By applying the two-step valuation approach set out in Diligenti , the Court concluded that no minority discount should be used to determine the value of the Pilch shares.
This case demonstrates that minority shareholders who find themselves being oppressed by the majority, and who seek to have their shares purchased by the majority or the company to extricate themselves from the majority’s oppressive conduct, need not accept a reduced purchase price for their shares based on the application of a minority discount.
Blumberg Segal LLP handles shareholder disputes and oppression matters. If you have an oppression related issue, we encourage you to contact us.
Ron Segal is a partner at Blumberg Segal LLP, practicing in commercial litigation, including shareholder disputes and oppression matters. Ron can be reached at firstname.lastname@example.org or 416-361-1982 ex. 239.