The Role of Voting Rights in Determining Business Value: A Look at DLVR

According to Tamir Levy, Ph.D., founder-CEO of Equitest and a professional valuer, "Voting rights play a crucial role in determining the value of a business." The discount for lack of voting rights (DLVR) refers to a company's stock price decrease because its stockholders do not have a say in critical corporate decisions. This is common with non-voting or Class B shares, which company insiders like executives and directors often hold.

In this article, we delve into the effect of voting rights on a business's value and the significance of the DLVR in business valuation. We provide perspectives on the advantages and disadvantages of non-voting shares and their impact on a business's value.

Dr. Levy believes that "understanding the DLVR and the role of voting rights in business value is essential for investors who desire control and influence in companies." By being knowledgeable about the DLVR and its impact on business valuation, investors can make intelligent investment decisions and maximize their returns on non-voting stock investments.

What are Voting Rights?

Voting rights, in the context of corporate governance, are the privileges given to shareholders to have a voice in crucial business decisions. As a shareholder, you have the right to vote on matters such as the selection of directors, the approval of mergers and acquisitions, and alterations to the company's bylaws. These rights empower you, as an investor, to have a say in the company's management and hold the management accountable for their actions. The number of voting rights a shareholder holds usually corresponds to the number of shares they own. Some companies may also issue different types of stock with diverse voting rights, such as non-voting or Class B shares, which insiders like executives and directors of the company often hold.

What is the impact of voting rights on business value?

Voting rights can impact a business's value in several ways. Investors need to understand the impact of voting rights on business value to make informed investment decisions.

1. Good governance: Companies with high levels of shareholder democracy and good governance tend to be more attractive to investors. These companies are perceived as having better management and more transparent decision-making processes. Companies that provide voting rights to their shareholders are often seen as more democratic and transparent, which can increase the company's perceived value and stock price.
2. Shareholder influence: Voting rights give shareholders a say in important corporate decisions, such as the election of directors, approval of mergers and acquisitions, and changes to the company's bylaws. By participating in these decisions, shareholders can help to prevent management from making decisions that may harm the company or its shareholders. Companies that do not provide adequate voting rights to their shareholders may be seen as less attractive by investors and may experience a discount in their stock price.
3. Control: The number of voting rights a shareholder has can affect their power and influence over the company. For example, a shareholder with many voting shares may have more influence over the company's management and decision-making processes. This can increase the perceived value of the shareholder's investment and the company's overall value.

What is the Discount for Lack of Voting Rights?

The discount for lack of voting rights (DLVR) refers to the reduction in the value of a company's stock price because the stockholders do not have voting rights on critical corporate decisions. This is often the case with non-voting or Class B shares, usually held by insiders such as company executives and directors. The DLVR occurs because investors are willing to pay a lower price for a stock with limited decision-making power, even if it has the same potential for dividends and capital appreciation as a stock with full voting rights.

Let's say that a company named ABC Inc. has 1 million shares outstanding, 500,000 of which are voting shares and 500,000 of which are non-voting shares. The voting shares have a market value of $50 per share, while the non-voting shares have a market value of $45 per share. The DLVR equals $5 per share (50 - 45).

Based on the market's perception of the company, the non-voting shares are valued at $5 less than the voting shares, despite being the same company with the same financial performance and prospects.

It's important to note that this is just an example, and the actual value of the DLVR may be different for each company and may change over time. Other factors, such as the level of shareholder democracy and good governance, the level of control and influence the shareholders have over the company's management, and the market's perception of the company's financial performance and prospects can also impact DLVR.

In conclusion, the discount for lack of voting rights (DLVR) is an essential concept for investors and businesses to understand, as it can impact a company's perceived value and stock price and market capitalization. Voting rights give shareholders a say in important corporate decisions. They can increase the perceived level of good governance, transparency, and accountability at a company, all of which can positively impact its value.

However, the value of DLVR can be challenging to calculate and may change over time, making it essential for investors to monitor it regularly. To help with this, it is recommended to use business valuation software. This software can provide up-to-date information on DLVR and other key metrics to help investors make informed investment decisions. By using business valuation software, investors can better understand the value of their investments and make informed decisions that can help maximize their returns.

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