Arnoud Pijls (Radboud University Nijmegen – Business and Law Research Centre, Institute for Financial Law) and Wouter Verbeek (Berenschot Business Management) have posted The Valuation of Control Attached to Shares on SSRN. Here is the abstract:
In legal proceedings concerning the valuation of shares, the question regularly arises as to whether the value of control attached to those shares can be considered separately and, if so, how. In this article, the authors address these questions and propose a concrete method for determining the value of control. This method combines insights from classical valuation theory with established concepts from game theory.
The value of control for a (prospective) shareholder depends on three variables: (i) the shareholder value of the company assuming a stand-alone going concern situation; (ii) the shareholder value of the company assuming it is optimally managed; and (iii) the extent to which the shareholder has actual control through the exercise of their voting rights.
Within game theory, extensive research has been conducted into how much influence a particular actor with a certain number of voting rights can have on the outcome of a vote, given the distribution of the other voting rights. One of the best-known power indices is the Shapley-Shubik power index. In this article, this index is used as a ‘proxy’ for the degree of control held by a particular shareholder.
The proposed method is sufficiently straightforward to be applied in valuations in the context of closed relationships. A possible drawback of the method is that it requires an estimate of the shareholder value of the company, assuming it is optimally managed. Such an estimation inherently involves a certain degree of subjectivity.
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