Page 37 - Business Valuation for Estates & Gift Taxes

Determining the amount of control specific to an ownership interest is not always straightforward. State
statutes, the company’s articles of formation, bylaws and agreements, as well as the overall ownership
distribution of the company must be considered individually as well as collectively. fn 1 An overview of
common ownership structures is discussed in the following text.

100 percent unilateral control—When an owner owns 100 percent of a company’s equity, that individ-
ual can make decisions without regard to majority or supermajority requirements and does not have to
be concerned with non-controlling owner rights.

Less than 100 percent, but more than a supermajority—In some states, more than a simple majority
is required for major actions such as a merger, sale of the assets, or liquidation of the company. If an
owner’s ownership percentage exceeds the statutory requirements of his or her jurisdiction, the owner
would have to consider the rights of the other owners, but would not be subject to having actions
blocked.

Less than a supermajority, but more than 50 percent—An owner with more than 50 percent of the
vote may have significant control over the business but may also be required to obtain approval from
other owners for certain actions that require a supermajority.

A 50-percent ownership—A 50-percent interest generally represents neither a controlling ownership
position nor a non-controlling ownership position. The holder of a 50-percent ownership interest is like-
ly to have significant influence over the company (and other shareholders) and may be able to initiate or
prevent certain actions within a company, but usually must obtain votes from other owners to conduct
more significant transactions.

Less than 50 percent but the largest voting block—Similar to the 50-percent ownership described
previously, if an owner owns less than 50 percent of a company, but that individual has the largest vot-
ing block of stock, the owner would likely have significant influence over the company. Of course, de-
pending on how much less than 50 percent is owned, the shareholder may require more minority share-
holder consensus to initiate or prevent any company change. The distribution of the other shares will de-
termine the relative ease or difficulty of getting the necessary votes.

Less than 50 percent but in a "swing vote" position—An owner is said to be in a swing vote position
when the interest he or she owns is less than 50 percent of a company’s equity, but sufficiently large
enough that other minority owners would seek to unite their votes. Depending on the distribution of the
company’s ownership, a swing vote position can yield significant influence over the company because
this interest’s vote may be required to break a deadlock.

Less than 50 percent and not in a swing vote position—This is the least influential position for an
owner to be in. The vote of such an owner has little, if any, influence on its own and the block is not
large enough for the owner to be courted as a swing vote. This owner is essentially a passive investor.

The process of determining the level of ownership and the degree of influence that may or may not be
associated with the ownership interest can be complex, especially given the varying degrees of owner-
ship interests and diverse state and local laws that affect corporate structure and governance. Therefore,

fn 1 N.B., for the purposes of this discussion, the term company is meant to encompass all forms of privately held entities, such as C
corporations, S corporations, partnerships, and so on.

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