Working control occurs when a minority shareholder, or group of them, has enough voting power to influence or determine corporate policy. This commonly occurs in corporations where share ownership is widely dispersed, and no single individual holds a majority interest, meaning ownership of 51% or more of the voting shares.
In such scenarios, an individual shareholder with a 20% stake in a company often controls a large enough position to achieve working control. Alternatively, a group of shareholders working in concert can exert significant influence over the company’s direction.
Key Takeaways
- Working control allows minority shareholders to influence or determine corporate policy.
- It exists in corporations with widely dispersed share ownership, without a single majority interest holder.
- There are no fixed benchmarks, but generally holding 20% of voting shares is enough for working control.
- Multiple minority shareholders can unite to obtain working control within a corporation.
Understanding Working Control
When you buy stock in a company, you become a minority shareholder. This provides you with a percentage of ownership and a share of the company’s profits but often very little influence over the company’s direction. Generally, only when holding more than half of a company’s outstanding shares can stakeholders set policy and procedures.
However, minority shareholders can gain control with a smaller stake if there is no dominant majority shareholder. Owning at least one-fifth of shares or joining forces with other minority shareholders can help achieve this. Acquiring working control can be more challenging in industries where founders retain a majority of voting shares, like in many technology companies. Examples include companies structured to keep power among original owners.
Still, companies with turnover at the executive or board level can become targets for activist investors, like hedge funds or private equity firms, who buy up enough shares to obtain working control and influence significant changes without a complete purchase.
Working Control Requirements
Once investors cross the necessary threshold, typically 20% of all outstanding voting shares, companies must disclose this in their financial statements, signifying the presence of working control. Not all shares carry voting rights, with preferred stock being a notable example.
Advantages and Disadvantages of Working Control
Having working control of voting shares grants significant influence over strategic and operational decisions. This power can lead to positive outcomes, such as instigating necessary changes and improving capital allocation.
However, the impact depends heavily on who holds working control. Disruptive figures on the board can create a toxic environment and bad press, potentially leading to poor decision-making. Some entities seek to use their influential position for personal gain rather than the company’s long-term well-being, engaging in practices like asset stripping or questionable share repurchase programs.
Positioning working control as a force for positive change can energize companies, steer them towards optimization, and safeguard against value erosion.
Related Terms: shareholder, majority interest, stakeholder, outstanding shares, voting shares.
