Majority stake

What Is Majority Stake?

A majority stake in a company refers to the ownership of more than 50% of its voting shares. This level of ownership typically grants the holder significant control over the company's operations, strategic decisions, and the composition of its board of directors. Holding a majority stake is a fundamental concept within corporate finance and corporate governance, as it directly impacts the power dynamics and direction of a business. It can be held by an individual, a group of individuals, another company, or even a government entity.⁶⁵,⁶⁴,⁶³

History and Origin

The concept of a majority stake and its implications for corporate control has evolved significantly over time. In the early 20th century, many large U.S. corporations were largely controlled by wealthy entrepreneurs who held a majority of the stock and actively managed their businesses.⁶² However, by the 1930s, a shift occurred towards "managerial capitalism," where ownership became more widespread, and professional managers, rather than the legal owners of equity, exerted effective control.⁶¹

The rise of institutional investors, such as pension funds and mutual funds, in the 1970s brought about another transformation. These large institutional investors began to hold substantial portions of many public companies, leading to a new form of "fiduciary capitalism," where monitoring by these investors became increasingly important.⁶⁰ Despite the general trend towards dispersed ownership in some regions, concentrated ownership, often in the form of a majority stake, has persisted in many countries and continues to play a central role in corporate governance globally.⁵⁹

A notable example of a significant acquisition involving a majority stake is Blackstone's purchase of Hilton Hotels in 2007. The private equity firm acquired all outstanding shares of Hilton for approximately $26 billion, making it one of the largest private equity deals at the time. This transaction, structured as a leveraged buyout (LBO), gave Blackstone a majority stake, allowing it to influence Hilton's strategic direction and ultimately lead to a profitable exit through an initial public offering (IPO) in 2013.⁵⁸,⁵⁷,⁵⁶

Key Takeaways

• A majority stake represents ownership of more than 50% of a company's voting shares.
• It grants the holder significant control over the company's strategic decisions and board appointments.
• Majority shareholders often have the power to influence management, mergers, and significant operational changes.
• While providing control, majority ownership also comes with fiduciary duties, particularly towards minority shareholders.
• Publicly traded companies with a single majority shareholder are less common, with institutional investors often holding controlling interests.

Formula and Calculation

The concept of a majority stake is defined by a simple percentage threshold rather than a complex formula. It signifies ownership of more than half of a company's outstanding voting shares.

The calculation is straightforward:

[
\text{Majority Stake} > 0.50 \times \text{Total Voting Shares Outstanding}
]

Where:

• Total Voting Shares Outstanding represents all shares that have been authorized, issued, and are currently held by investors, including restricted shares.

For example, if a company has 1,000,000 voting shares outstanding, a majority stake would require ownership of at least 500,001 shares. This numerical control enables the majority stakeholder to typically win most shareholder votes.

Interpreting the Majority Stake

Interpreting a majority stake goes beyond simply recognizing numerical control; it involves understanding the practical implications for a company's governance and future. When an individual or entity holds a majority stake, they generally possess the power to elect and remove members of the board of directors, approve major corporate actions like mergers and acquisitions, and influence critical financial and operational decisions.⁵⁵,⁵⁴

In private companies, a majority shareholder often has direct operational control and may hold executive roles, significantly impacting daily business activities and strategic initiatives.⁵³ In publicly traded corporations, while direct day-to-day management may not be assumed by the majority shareholder, their voting power allows them to shape corporate policy and appoint key leadership.⁵² The presence of a majority stake can also influence the confidence of other shareholders and the overall governance structure of the company.

Hypothetical Example

Consider "InnovateTech Inc.," a burgeoning tech startup. Initially, the company was founded by three partners, each holding an equal 33.3% ownership. As InnovateTech sought to scale rapidly, it pursued a Series B funding round. "Capital Ventures," a private equity firm, saw significant potential in InnovateTech's patented software.

Capital Ventures negotiated to acquire 60% of InnovateTech's voting shares through a combination of new share issuance and purchasing some shares from the original founders. Upon completion of the deal, Capital Ventures now holds a majority stake in InnovateTech Inc. This means Capital Ventures has the authority to appoint a majority of the seats on InnovateTech's board of directors, approve the company's annual budget, and greenlight future strategic partnerships or expansions. While the original founders still retain a substantial ownership percentage, their direct control over major decisions has shifted to Capital Ventures.

Practical Applications

A majority stake is a critical element across various financial and corporate scenarios:

• Mergers and Acquisitions (M&A): Acquiring a majority stake is often the primary goal in an acquisition. It provides the acquiring company with control over the target firm's assets, resources, customer base, and operational premises.⁵¹ For instance, Disney's acquisition of 21st Century Fox provided Disney with a majority stake in Hulu, enhancing its streaming capabilities.⁵⁰ Similarly, in 2017, the merger between Shenhua Group and China Guodian Corporation, two state-owned enterprises, created the world's largest power utility company, with the government effectively holding the majority stake.⁴⁹

• Corporate Governance: The presence of a majority stake significantly influences a company's corporate governance structure. Majority shareholders can elect board members, approve major strategies, and influence governing documentation.⁴⁸,⁴⁷,⁴⁶ The OECD Principles of Corporate Governance, for example, emphasize the rights of shareholders and the responsibilities of the board.⁴⁵,⁴⁴,⁴³

• Private Equity and Venture Capital: Private equity firms and venture capitalists frequently acquire majority stakes in companies, especially during leveraged buyouts. This allows them to implement operational changes and drive value creation.⁴² For example, KKR recently acquired a majority stake in HealthCare Royalty Partners, a biopharma royalty acquisition company.⁴¹

• Reporting Requirements: In publicly traded companies, entities acquiring a beneficial ownership of more than 5% of a voting class of equity securities are typically required by the SEC to publicly disclose their ownership on Schedule 13D or Schedule 13G. This ensures transparency in ownership structures.⁴⁰,³⁹,³⁸,³⁷,³⁶

Limitations and Criticisms

While a majority stake typically grants significant power, it is not without limitations and criticisms, particularly concerning corporate governance and the treatment of other shareholders. A common misconception among founders, especially in venture-backed companies, is that owning 51% or more of a company's shares guarantees job security or absolute control over all decisions. However, bylaws and board structures can dictate that the board of directors, not necessarily the majority shareholder, holds the power to hire and fire executives.³⁵ Even with a majority stake, a board stacked against the majority shareholder can vote to remove them from their position.³⁴

Moreover, majority owners, especially in privately held companies, are subject to fiduciary duties that limit their discretion. These duties prevent majority owners from operating the company solely for their own benefit and require them to provide minority partners with access to financial records for a proper purpose.³³ Abuse of majority control can lead to legal challenges, including claims of shareholder oppression or breach of fiduciary duty.³²,³¹,³⁰ Examples of such breaches include withholding dividends while excessively compensating themselves, diluting shares to reduce minority ownership, or denying access to company information.²⁹

The general rule in corporate governance is that majority rule prevails unless there's an agreement or statutory requirement to the contrary. However, legal principles have evolved to limit the freedom of the majority, particularly in non-public business entities.²⁸ The legal rights of minority shareholders vary by state and entity type, but they generally have protections against unfair prejudice.²⁷

Majority Stake vs. Minority Stake

The primary distinction between a majority stake and a minority stake lies in the level of ownership and, consequently, the degree of control and influence an investor holds within a company.

While a majority stake provides the clear advantage of control, a minority stake can still be valuable for investors seeking financial returns or a degree of influence without the full responsibility of direct management.¹¹,¹⁰ The choice between acquiring a majority or minority stake often depends on the investor's strategic goals, desired level of involvement, and the amount of capital being invested.⁹

FAQs

What does "majority stake" mean in simple terms?

A majority stake means owning more than half of a company's voting shares. This gives the owner the power to make most of the important decisions for the company.

Does holding a majority stake mean absolute control over a company?

While a majority stake grants significant control, it does not always mean absolute control. For instance, in some cases, company bylaws or legal frameworks, particularly those protecting shareholder rights, may limit the majority owner's ability to act without considering minority interests.⁸,⁷

How is a majority stake typically acquired?

A majority stake can be acquired through various means, including direct purchases of shares, mergers, acquisitions, or private equity investments where a significant portion of a company is bought.⁶,⁵,⁴

What are the responsibilities of a majority shareholder?

Beyond the power to influence decisions, majority shareholders, especially in closely held companies, often have fiduciary duties to act in good faith and in the best interests of all shareholders, including minority shareholders. This means avoiding actions that unfairly prejudice other owners.³,²

Can a company have more than one majority shareholder?

Typically, a company will only have one majority shareholder or a single group acting in concert that collectively holds over 50% of the voting shares. If multiple parties each hold more than 50%, it implies different classes of shares or specific agreements that define voting power. However, it's more common to see one primary majority owner.

How does a majority stake affect the sale of a company?

Holding a majority stake generally means the owner has the power to approve or reject the sale of the entire company, as such transactions usually require shareholder approval. This gives them significant leverage in any sale negotiations.¹