Page 33 - Bankruptcy and Reorganization Services

interest. Frequently, the terms noncontrolling interest and minority interest are used interchangeably to
describe an ownership interest; however, this is not always an accurate description. For example, where
a 20% interest may be a minority interest and a noncontrolling interest, a 50% interest may also be non-
controlling but would have the ability to exert more influence than the 20% owner (although it would
legally be a minority interest in simple majority jurisdictions). Depending on the makeup of the remain-
ing ownership interests and other factors, the difference between the degree of influence that a 20% in-
terest and a 50% interest can exert may be significant. Therefore, it is critical for the practitioner to care-
fully consider all the characteristics of the ownership interest.

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 and collectively (note: 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 the like). The following is an overview of common own-
ership structures:

100% unilateral control. When an owner owns 100% of a company’s equity, he or she can make
decisions without regard to majority or supermajority requirements and does not have to be con-
cerned with noncontrolling owner rights.

Less than 100%, 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 hav-
ing actions blocked.

Less than a supermajority, but more than 50%. An owner with more than 50% 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.

50% ownership. A 50% interest generally represents neither a controlling ownership position nor
a noncontrolling ownership position. The holder of a 50% ownership interest is likely 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% but the largest voting bloc. Similarly to the 50% ownership described in the pre-
ceding paragraph, if an owner owns less than 50% of a company, but has the largest voting bloc
of stock, he or she would likely have significant influence over the company. Of course, depend-
ing on how much less than 50% is owned, the shareholder may require more minority sharehold-
er consensus to initiate or prevent any company change. The distribution of the other shares will
determine the relative ease or difficulty of getting the necessary votes.

Less than 50% 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% of a company’s equity but is sufficiently large
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.

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