Preference shares
Lotus Amity value preference shares in privately held companies. Preference share valuations are often required in shareholder disputes, for tax purposes and to allow the valuation of the balancing ordinary shares. A preference shareholder may typically have a few advantages over ordinary shareholders, including:
- liquidation preference – if the company is sold or round 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, preference shareholders may have limited voting rights compared to ordinary shares.
When valuing preference shares, 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.
Experience
Examples of preference share valuation engagements include the following:
- Valuation of the preference shares in 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 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.