With the growing popularity of investing as a way to save and increase funds, exchange trading is rapidly becoming commonplace for more and more people. Millions of people buy and sell stocks every day, looking at this process as a kind of virtual game where you need to guess the direction of the chart movement. The very process of buying and selling shares resembles more a bet in a gambling game. Nevertheless, buying a share, an investor acquires, albeit, as a rule, a very small, but still a share in the company, becomes one of its owners, that is, receives all the rights arising from such ownership rights, including the right to manage the company.
The management of the joint-stock company has a three-level structure: the most important issues are decided by the general meeting of shareholders; no less important, but current issues are under the jurisdiction of the board of directors; finally, the current operational management is carried out by the executive body.
The owners, that is, the shareholders of the company, if they are not also its employees, acting members of the board of directors or the executive body, participate in the management of the company only by voting at the general meeting of participants.
A block of shares is the number of shares of a joint-stock company owned by one shareholder or, in special cases, not in direct possession, but controlled by him.
Since joint-stock companies, especially public ones, have a large number of members, issues submitted to the general meeting are decided by a general vote, the decision is made by a simple majority, in some cases a so-called “qualified majority” is required, which is 75% of the number of votes. The number of voting shares required to make a decision that simply requires a majority of votes is called a controlling interest.
Controlling block of shares is the number of voting shares at the disposal of a shareholder, sufficient to make the majority of decisions at the general meeting of shareholders.
In the simplest case, the controlling stake consists of 50% +1 share. For example, if a company has 1,000 ordinary shares issued, 501 shares are sufficient to hold a controlling interest. The owner of a controlling stake is called the controlling shareholder. The controlling shareholder usually appoints the majority of the company’s board of directors (the number of seats on the board is often odd). It is the controlling shareholder, through the board of directors, who appoints the executive body of the company, determines its strategy and influences the main issues of the current agenda. The controlling shareholder, through the board of directors, controls the allocation of dividends by the company, and through a vote at the general meeting, the decision on payment.
Since the organizational and legal form of a joint-stock company presupposes a large number of shareholders, each of whom has its own rights, a controlling stake does not give full control over the company. Thus, a number of issues can be resolved only by a qualified majority of more than 75% of the votes. The majority decide the following issues:
- Introduction of amendments and additions to the charter of the company or its approval in a new edition;
- Determination of the quantity, par value, type of authorized shares and the rights granted by them;
- Reorganization of the company;
- Liquidation of the company, appointment of a liquidation commission and approval of interim and final liquidation balance sheets;
- Approval of major transactions, the subject of which is property worth over 50% of the book value of the company’s assets;
- Acquisition of placed shares by the company.
Thus, in contrast to the controlling stake, a blocking stake is often allocated, which is 25% +1 share. The blocking package allows, if desired, to block any decision on the most important issues listed above, for which a qualified majority is required. Thus, for full control over the company, the controlling shareholder must negotiate with the shareholder holding the blocking stake, or strive to own more than 75% of the shares himself. This is the only way to fully control the company.
Majority and minority shareholders
In practice, the company does not always have one controlling shareholder. If none of the shareholders owns more than half of the voting shares of the company, then the controlling shareholder can be played by the one with the most shares, but in this case it is more appropriate to call such a shareholder or his block of shares majority. A majority shareholder who does not have a controlling stake in the usual sense cannot always control 100% of the election of the executive body and the distribution of profits, however, in conditions when other shareholders do not act in concert, the majority shareholder can have influence comparable to the capabilities of the controlling shareholder.
In contrast to the majority shareholder, it is customary to single out minority shareholders, that is, those who do not decide anything separately. However, minority shareholders can also influence the management of the company, in some cases – a determining one. So, if there is a majority shareholder with less than 50% of the shares, the minority shareholders uniting, that is, voting together, can make the necessary decision. In practice, of course, it is difficult for a large number of shareholders to coordinate to make a common decision, at least if the matter does not concern any natural common interests. In addition, in practice, it is rare for majority shareholders who have not secured more or less serious control over the company, sometimes through auxiliary instruments such as a shareholder agreement or other agreements with other shareholders.
The definition of control often revolves around the difference between the number of shares and the number of votes. Thus, there are preference shares that do not vote on the usual agenda items of the general meeting. Thus, a shareholder can have a share in the authorized capital of more than 50%, but at the same time not have a majority of votes at the general meeting. In foreign corporate practice, especially in the United States, there are often cases where certain categories of shares have more votes than others. Thus, some categories of shares of Alphabet (Google) provide the owner with 10 votes, while “standard” ones – only one. Such shares with special rights belong, as a rule, to the founders of the company, which allows them to attract investors without losing control over the company.
In other cases, control over the company can be achieved through shareholder agreements.
A shareholder agreement is an agreement between the shareholders of a company for the exercise of their corporate rights.
Thus, shareholders can agree with each other to vote on certain issues on the agenda of the general meeting in a certain way. Or they can agree that one of them does not vote at all, or votes like another party to the agreement. Thus, a shareholders’ agreement can allow control of the company without owning a controlling interest. Since shareholder agreements are concluded between individual shareholders, the content of such agreements is often not known to third parties, which may allow hidden control of the company. In any case, before contradictions arise.
Despite the fact that the controlling stake allows to exercise control over the companies, minority shareholders cannot be called disenfranchised. So, for example, all shareholders are equally entitled to payments from the company in the form of dividends, to repurchase their shares, to part of the company’s property in the event of its liquidation (in accordance with their share in the authorized capital). Any shareholder has the right to take part in the general meeting of participants, including in person, attending such a meeting.
A minority shareholder holding 2% of shares can nominate for voting a candidate for the board of directors, collegial executive body, audit commission, and also make proposals on issues included in the agenda of the general meeting. With 10% of shares, a shareholder can initiate the convocation of an extraordinary general meeting, demand an audit of the financial and economic activities of the company. With 15% of the shares, the shareholder gets the right to appoint 1 representative to the board of directors if such a board has more than 7 seats.
It is also worth noting that the public status of the company imposes some restrictions on the possibilities of the owner of the controlling stake. Thus, all trading platforms impose additional requirements on listed companies, especially those that are classified at high listing levels. These requirements may include the presence of independent directors on the board of directors. Members of the board of directors who are not directly appointed by individual shareholders and who are not directly dependent on them are considered to be independent. The presence of independent directors is important to protect the rights of minority shareholders.
It is worth touching on the topic of abuse of the controlling shareholder’s capabilities. So, having control over the operating activities of a company, it is possible to optimize the calculations of a group of companies, or to withdraw profits from the company bypassing its distribution, for example, in the form of issuing loans, sometimes unrecoverable or not entirely consistent with market conditions. The practice of protecting minority investors from such abuses, alas, is still very undeveloped. Hopefully, as the financial markets develop, the situation will be corrected. In the meantime, knowing the owners of the companies, the capabilities and reputation of the controlling shareholders in the portfolio of shares is just as important as analyzing their fundamentals or macroeconomic factors.
