Page 32 - Bankruptcy and Reorganization Services

Prerogatives of Control

The benefits of control can be wide ranging and can add significant value to interests that have control-
ling ownership characteristics. The degree of control by majority owners can have an equally significant
impact on the discounts applied to minority owners. Rights associated with majority ownership include,
but are not limited to, the right to

 appoint or change operational management,

 elect directors,

 establish management compensation, including prerequisites,

 change the articles of incorporation or bylaws,

 enter into related party transactions,

 negotiate agreements,

 raise and deploy capital,

 dissolve or recapitalize the company,

 merge with or buy another company,

 set policies,

 declare and pay dividends, or

 determine future operational plans.

Control considerations are often more important for companies in financial distress than for other com-
panies. This is because companies that are in financial distress are likely going through change or will
need to go through change. Companies in financial distress are not in a stable equilibrium. This means
that decisions will need to be made regarding how the financial distress will be remedied. This will in-
clude both day-to-day operating decisions as well as strategic decisions regarding the restructuring, sale,
or liquidation of the business. In a Chapter 11 bankruptcy setting, there may need to be a vote of the
shareholders to accept or reject the plan of reorganization. The ability to influence or control these deci-
sions will have not only an impact on the overall value of the business, but likely a differential impact on
the value of different classes of debt and equity in the company’s capital structure.

Degree of Control

If an ownership interest has the characteristics of control (that is, the ownership interest can make deci-
sions that impact the operations, management, direction, or distribution policy of the company) then it is
appropriate, in fact necessary, to consider these characteristics when determining the fair market value
of the interest. In most cases, the ownership interests are likely to have a greater fair market value than
they would if those features did not exist because the future benefit stream is expected to be larger. Be-
tween the two extreme levels of control (all or none), a continuum exists, reflecting factors that can en-
hance or diminish control and consequently, increase or decrease the fair market value of an ownership

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