Voting Power
In order to determine which individuals have the requisite beneficial ownership interest to meet the 25% reporting threshold, one of the salient factors is Voting Power. Voting Power is often easy to assess, because it is generally discernable from the entity’s documents. The simplest situation is one where the entity issues shares of one class of stock, each share is owned by an individual and has an equal vote, and no options exist for anyone to acquire additional shares. In this case, one can simply take the number of shares an individual owns and divide it by the total outstanding shares that exist, to determine their Voting Power. Similarly, even if there are no individual shares of stock, it is common for voting power to be apportioned in percentages which speak for themselves.
Things are more complicated when there are different classes of stock, with different Voting Power, and/or some Voting Power is held by entities that have their own ownership/voting power arrangement (called Indirect Ownership).
In the case of multiple classes of stock, one must engage in additional arithmetic to determine an individual’s Voting Power. An example may help illustrate the problem/solution:
Company A has two classes of stock. There are fifty (50) shares of Class A stock, and each share is allocated one vote. There are also one hundred (100) shares of Class B stock, and each Class B share is allocated one-half (1/2) vote. First, you need to determine the total number of votes that exists. In this example, there are fifty (50) Class A votes (50 shares x 1 vote/share), and fifty (50) Class B votes (100 shares x 0.5 vote/share) for a total of one hundred total possible votes. Next, you need to determine whether any voter/shareholder holds more than 25% of the Voting Power. This is done by simply totaling all votes an individual controls and diving that number by the total possible votes. In our (easy) example, an individual that controls thirty (30) votes would control 30% of the Voting Power (30 shares ÷ 100 total shares = 30% Voting Power) and is required to register.
Next, let’s consider a situation in which there is some Indirect Ownership to evaluate:
Company A has issued 100 shares of stock (there are no classes of shares), and each share is entitled to one (1) vote. Fifty (50) shares are owned by individuals and the other fifty (50) shares are owned by another company, Company B. Obviously, the calculation of Voting Power for the fifty (50) shares owned by individuals is straightforward (like the example at the beginning of this article). But the fifty (50) shares owned by Company B must also be assessed, as well. In this example, Company B is itself owed by two (2) individuals, Allen with 30% of the Company B voting power and Betty with 70% of the Company B voting power. To determine whether either of the Company B shareholders must register beneficial ownership in Company A, you need to evaluate the extent to which they control Company B’s Voting Power in Company A. This is done by taking Company B’s total Voting Power and multiplying it by an individual’s voting power in Company B. In our example, Betty’s Voting Power in Company A is calculated by taking the total Voting Power Company B controls (50%) and multiplying that by Betty’s voting power in Company B (70%), to determine that Betty controls 35% of Company A’s Voting Power (50% x 70% = 35%) through her Indirect Ownership, and her beneficial interest in Company A must be reported.
Finally, it is important to remember that a company’s outstanding Options, or other contingent opportunities to acquire Voting Power, must be included in any calculation of Voting Power, as well. This means that, for the purposes of calculating Voting Power, all options must be treated as if they have been exercised. Again, an example is helpful:
Company A has issued fifty (50) shares of stock, as well as options to purchase an additional fifty (50) shares of stock, with each share entitling its owner to one (1) vote in Company A. Company A is then treated as if all of the Options have been exercised, meaning it has a total of one hundred (100) voting shares. Allen currently owns the fifty (50) shares issued by Company A, while Betty owns Options to purchase fifty (50) additional shares. Despite the fact that Allen controls all Company A voting in the real world (since he votes the only shares that are actually owned by someone), for the purpose of recording beneficial ownership, Betty controls 50% of the Voting Power of Company A, and her beneficial ownership is subject to reporting.
Each of these situations may, of course, exist in any combination. There are also myriad other mechanisms by which an entity’s Voting Power may be allotted, which are beyond the scope of this basic article. Accordingly, one may need to engage in a very complicated analysis of Voting Power to determine the individuals that meet beneficial ownership reporting requirements. Of course, this situation also provides potential opportunities for structuring ownership schemes with these rules in mind. It is important to engage in a methodical approach to calculating Voting Power, or an entity may risk missing a reporting obligation (and result in the imposition of the serious penalties for such an infraction).
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- Classes of Ownership (6)
- Direct Ownership (9)
- Voting Power (6)
