Control without a majority of voting rights

Control without a majority of voting rightsControl without a majority of voting rights is a more special case of structuring the investments of investors in companies. IFRS 10 confirms that an investor with the majority of an investee’s voting rights controls an investee in most circumstances. In the absence of other relevant factors the majority vote holder has control if: Control without a majority of voting rights

In special cases, control is possible without having to own more than 50% of voting stock. For example, if agreed, shareholders may pass control to a chosen one owning much fewer shares (for example in the case of the two petroleum companies, MOL Group and INA – Industrija nafte).

In other cases, companies divide their stock into voting and non-voting classes, which can allow a small minority of shareholders to control a majority of the voting shares. This technique is often used to allow a company’s founders to cash out much of their ownership without giving up control.

In the American media, dual-class structures caught on in the mid-20th century as families such as the Grahams of The Washington Post Company and the Ochs-Sulzbergers of The New York Times sought to gain access to public capital without losing control. Dow Jones & Company, publisher of The Wall Street Journal, had a similar structure and was controlled by the Bancroft family but was later bought by News Corporation in 2007, which itself is controlled by Rupert Murdoch and his family through a similar dual-class structure. Control without a majority of voting rights

IFRS 10 has more specific guidance on when the majority owner does not have control in the following situations: Control without a majority of voting rights

Situation

Examples

Another entity that is not an agent has rights to direct relevant activities

  • another investor’s voting rights, plus its substantive potential voting rights, represent an overall majority of voting power,
  • investee’s relevant activities are subject to direction by:
    • government,
    • court,
    • administrator, receiver or liquidator,
    • regulator.

Voting rights are not substantive

  • when different factors are considered more weight is given to the evidence in the first row above.

The simple way out by assessing the involvement of a government, court, administrator (or similar) or regulator in an investee’s decision-making process results in no control is not that easy. It simply does not necessarily mean that a majority owner does not have control. Careful consideration of all facts and circumstances is necessary and judgment may be required. Control without a majority of voting rights

Picturing the background to ownership and control

Theoretically, shareholders own the company and hence the company ought to be run according to the dictates of the shareholders. However, in practice, there would be significant differences of opinion among shareholders and this leads to a situation where arriving at a consensus is not possible.

Something else -   The relevant activities of an investee

Hence, the provision that there needs to be a majority percentage of the shareholders to have effective control or say in the decision making of the companies has been established. This is also the case with any decision that is taken by the board of directors and the shareholders as control is in the hands of those who can drum up the required numbers of votes. This is the crucial distinction between shareholder ownership and control that is practiced in the real world. Control without a majority of voting rights

However, this is not to say that shareholder control always needs a majority of votes. For instance, there can be cases where many shareholders cede their access to other shareholders who can then act on their behalf. Further, institutional shareholders represent voting blocs who can have a greater say in running of the companies than the minority shareholders. Control without a majority of voting rights

It is these differences that are at the heart of the debate over shareholder ownership and control which determine the nature of control that is exercised in the corporate world. The point here is that shareholders are the owners of the company and hence, they have a right to control the company. However, as in any democracy, they need to have the numbers on their side to have a say in the running of the company.

Finally, in recent years, there has been an upsurge of shareholder activism mainly due to the fact that many corporate scandals have emerged leading to unease among the shareholders. So, it is indeed the case that shareholder control is necessary to prevent the management and the board from taking decisions unilaterally that are not in the best interests of the shareholders.

Something else -   Power

In conclusion, it is the case that shareholders be vigilant and are the custodians of their own interests rather than being passive and let the board or management decide on their behalf.

Control without a majority of voting rights

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Something else -   Assessment of investment entities

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