Classes of Ownership
One of the threshold issues that needs to be explored is which individuals have an ownership interest in a Reporting Entity. There are a number of manners in which an entity may grant an ownership interest to an individual. The first, and probably most basic class of ownership interests in an entity consists of straight-forward equity, stock, or voting rights. If the entity issues stock, or any other type of instrument, that provides voting power, this class of ownership interests exist. A company can also provide this kind of ownership interest by issuing certificates or subscriptions prior to the formal organization of the entity. More obscure means for the entity to provide this class of ownership would be issuing another type of transferable share, voting trust certificate, or certificate of deposit, for an equity security, joint venture interest or business trust certificate. All of these would signify that the entity grants ownership interests that fall in the class of equity, stock, or voting rights.
Similarly, a company may simply have ownership interests that consist of capital or profit interests. When individuals have a right to share in the entity’s profits, those individuals obtain this class of ownership interest in the entity.
Convertible interests are a more complex class of ownership interest that may be conferred upon an individual. This happens when the company issues any kind of instrument that may be converted into one of the ownership interests above. The instrument may require additional payment, or other some obligation precedent, but so long as it is capable of conversion to ownership, it falls within this class of ownership interest. This includes any warrant or right to purchase, sell, or subscribe to any interest in equity, stock, voting rights, or profit interest. This class is to be broadly construed and basically applies to any situation where an individual has any future right to an ownership interest, profit sharing, or voting right. Importantly, the individual does not ever even have to intend to exercise the right to be conferred the convertible interest class of ownership in the entity.
Similar to convertible interests, options or privileges are another class of ownership interests that an entity may confer. This class includes any instrument that provides an option or privilege of buying or selling equity, stock, voting rights, profit sharing, or even convertible interests. These may sometimes be called a non-binding put, call, or straddle. Simply, the entity has this class of ownership interests if the entity grants any individual any other future option to acquire ownership. Of course, any such option that may be created by others without the knowledge of the entity do not fall within this class (for instance, an individual shareholder could provide an option to a third-party allowing the third-party to acquire that shareholder’s stock, without creating an ownership interest for that third-party).
Finally, there is a “catch-all” class of ownership interest that applies to any other instrument, contract, arrangement, relationship, or mechanism to establish ownership that is granted by the entity. In short, regardless of the name applied to it, any mechanism the entity creates that gives an individual any right to acquire ownership, voting rights, or profit participation, falls within the catch-all class of ownership interest.
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- Classes of Ownership (6)
- Direct Ownership (11)
