Preference share valuations
Lotus Amity provides preference share valuations. Preference share and special class share valuations are often required in shareholder disputes, for tax purposes and to allow the valuation of the balancing ordinary shares. A hold of preference shares may typically have a few advantages over ordinary shareholders, including:
- Liquidation preference. If the company is sold or wound up, the preference shareholders receive proceeds in priority to the ordinary shareholders and these proceeds may be a fixed minimum amount.
- Dividend preference. The right to a predetermined preferred dividend and or right to dividends before ordinary shareholders.
- Conversion preference. The right to convert the preference share to a set number of ordinary shares.
In exchange for these advantages, holders of preference shares may have limited voting rights compared to ordinary shares.
Special shares implies that there is something inherently different to the ordinary shares. The special shares may be in essence preference shares or they maybe shares that are limited compared to ordinary shares. Limitations may include limitations on voting rights, entitlement to dividends and entitlement to capital. These limitations may exist if certain hurdles are not achieved, such as reaching earnings, dividend and or asset value hurdles. Special shares may be issued to management as a way to incentivise future financial performance.
When providing preference share and special share valuations, Lotus Amity analyses the advantages (and any disadvantages) that may influence the future cash flows available to the shareholders and their ability to sell those shares.
Case studies
The following case studies illustrate our experience in providing preference share and special shares valuations:
- Preference share valuations in relation to an investment management group. Valuation prepared to assist in the pricing of future preference shares. In a liquidation event, the preference shareholders had a right to receive at a minimum their share issue price first. Lotus Amity analysed the preference share terms (compared to ordinary share terms) and past share transfers and modelled the likelihood of a liquidation event and the value of all the shares in a liquidation event.
- Valuation of the special class shares issues to the directors in a hotel pub group. The special class shares provided a right to receive a share of dividends and or capital, subject to meeting certain conditions. Conditions included meeting an EBITDA to equity value hurdle rate and a net asset value to investment equity value percentage. Special class share dividends were also linked to the ordinary shareholder dividend rate as a percentage of NPAT. Shares valued using a Discounted Cash Flow method for the group and estimating the likelihood of meeting the conditions for dividend and or capital entitlements.
- Valuations of the preference shares to be transferred to employees in a national early learning group. Valuation required for tax purposes. In a company sale, the preference shareholders were to first receive their paid-up capital plus a fixed internal rate of return on the paid-up capital plus a pro-rated amount of the remaining proceeds. However, the preference shares were subject to a company clawback if employees did not meet future transactions metrics. The clawback amount depended on the extent the metrics were not met. Lotus Amity analysed the preference share and claw back terms and modelled expected future transaction metrics, the impact of the expected metrics on the clawbacks, the timing of a future company sale, the likely value of the company at that time and the likely range of proceeds payable to the preference shareholders.