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How much, if any, influence do non-controlling interest shareholders have? By Investopedia | July 13, 2015 — 11:04 AM EDT
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Non-controlling interest shareholders do not typically have much influence. The level of influence can vary, however, depending on whether the company is public or private and what terms are contained in the equity ownership documents.
For public companies, the ownership is generally spread across a very significant number of shareholders such that any individual shareholder typically does not hold significant power. In order to gain influence, a shareholder typically must have 5 to 10% of the outstanding shares to gain a board seat. Once in a board seat, a shareholder cannot make decisions individually but can build consensus around the board. Alternatively, the shareholder could take a more hostile approach and begin making certain demands of the company and sharing those demands through letters to the public. This is an approach that corporate raiders such as Carl Icahn made famous in the 1980s.
For private companies, the dynamics can be a little different. Minority equity investments are usually privately negotiated transactions where the majority owner and potential investor negotiate the terms with which the investor would invest. In a negotiation, potential minority investors have many different tools to gain influence or power despite not having a controlling vote. These tools include preferred returns, liquidation preferences, board seats, consent rights, tag-along provisions and put options.
Preferred returns and liquidation preferences are similar in that they provide the minority equity investor a minimum level of return before the majority owner receives any value. This forces majority owners to make decisions differently than they otherwise would. Board seats and consent rights are also similar in that the minority investors negotiate what decisions can be made with a simple majority versus a super majority of the shares. If a partnership is 51/49%, a minority investor can demand that acquisitions, for example, require a 60% vote so that the majority owner cannot proceed without some minority approval. Tag-along provisions and put options are similar in that they give the minority investor a path to liquidity and can't be stuck owning the company forever if the majority owner never sells.
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