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There seem to be 2 problems here: 1. Giving another party 49% doesn't guarantee you will have retaining control. You having 51% shares does guarantee that. So,

There seem to be 2 problems here: 1. Giving another party 49% doesn't guarantee you will have retaining control. You having 51% shares does guarantee that. So, their strategy was flawed. 2. Not sure if regulations allow this, but to make it bullet proof they should have made a contract that the PR group will not go beyond 49%. Without either of the above, the company just did not do good diligence.

arcticbull 3y ago
I believe the usual path in this type of situation is to dual-class shares, so you can retain voting control while selling beneficial ownership to others. I suspect the PE group would have, you know, rejected this arrangement given their plan.
- bonestamp2 3y ago
  If they reject it because of their plan then the strategy worked, although it might not seem like a win to the Founder at the time.
- worik 3y ago
  > the usual path in this type of situation is to dual-class shares Is that still tolerated by investors? Is it still legal? "Having your cake and eating it" is a really bad attitude
  - adastra22 3y ago
    It shouldn’t be tolerated nor legal, but it is.
    - csallen 3y ago
      What's wrong with it? If people want to be allowed to buy/sell second-class shares that don't have voting rights, then I don't see the problem with there being a market for that.
      - adastra22 3y ago
        It’s not a free market. Your options are buy the class of stocks that the company wishes to sell, or not participate at all. Therefore it can be aggressively abused to disenfranchise public shareholders who have no say in the creation of share classes in the first place. One important role of government is to set and maintain standards for listing on markets, so that customers are protected. An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote.
        Kamq 3y ago
        > Therefore it can be aggressively abused to disenfranchise public shareholders who have no say in the creation of share classes in the first place. Elaborate on this, because I think I'm misreading it. It seems to me like shareholders, generally already have a vote. Converting those shares, from voting to non-voting, would be quite illegal (at the very least breach of contract) without shareholder sign-off. Which they probably wouldn't do... y'know... because they're the shareholders. What's being discussed is issuing different shares (with approval of the voting shareholders). And if you don't like that, you can... just not invest in that company. There are several other companies you can invest in if that's what you want. And if the companies that offer only non-voting shares dominate (probably being driven by the founders)... most investors would probably want that. Most investors are looking for a return first and foremost. > An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote. I agree that it's an example of such a rule. Do you have an argument for why it's a good rule?
        bryanrasmussen 3y ago
        >It’s not a free market. Your options are buy the class of stocks that the company wishes to sell, or not participate at all. this is a pretty expansive definition of freedom, the freedom to buy unfettered options in a company.
        adastra22 3y ago
        I have no idea what you are talking about.
    - hn_throwaway_99 3y ago
      Why? I don't see any problem with dual class shares: 1. It's not like anything is being hidden - people who buy shares without (or with less) voting share rights know what they're getting, and can adjust the amount they're willing to pay for those shares accordingly. 2. Dual share is a double edged sword: if you believe and want a visionary founder to stay in control, you're good. At the same time, you should be clear that if the visionary founder goes off his rocker, there is not much people will be able to do to oust him. Zuckerberg pretty much shows these pros and cons perfectly. People were wringing their hands at the end of last year when Meta stock was in the toilet that there was nothing anyone could do to replace Zuckerberg. Now, though, Meta is up over 150% over the past year, and the fact that Zuckerberg could play a longer game and wasn't just ousted due to the share dip was probably ultimately good for investors.
  - Centigonal 3y ago
    > "Having your cake and eating it" is a really bad attitude Ray Dalio says the following in his book Principles: “When faced with the choice between two things you need that are seemingly at odds, go slowly to figure out how you can have as much of both as possible. There is almost always a good path that you just haven't figured out yet, so look for it until you find it rather than settle for the choice that is then apparent to you.” He credits this approach to helping his firm spearhead risk parity as well as other successes. Sometimes, trying to have your cake and eat it too leads to being able to do just that.
    - xyzelement 3y ago
      100%. At an old job, I worked with an eng manager who believed software quality and time to market were mutually exclusive. You decide which one is important to you and you go for that one. In his thinking, he then constantly failed to identify options that were both fast to build and good, usually due to significant simplification. He could never find these things because in his mind you couldn't have both. Later on, I worked for Ray for a few years and would always think of this dude whenever I encountered this principle.
  - martin8412 3y ago
    I don't know if you can still do it, but it's how Zuckerberg has retained control over Meta/Facebook. Zuckerberg and friends has 90% of the voting power, because the special class of shares has 10x voting power compared to regular shares.
- colechristensen 3y ago
  there are also “poison pill” provisions to prevent takeovers in various ways such as providing minority owners the ability to purchase stock at very steep discounts if a certain event is triggered
Cpoll 3y ago
> Not sure if regulations allow this, but to make it bullet proof they should have made a contract that the PR group will not go beyond 49%. Can this ever work? The PR group can control the 2% without nominally owning it.
- scrollaway 3y ago
  They don’t need to own the shares, they just need the shares to vote their way.
- RandomBK 3y ago
  The extreme case of this would be Poison Pills, so if that's allowed then I suspect you can contract for this as well. Having said that this is the type of thing that is likely to get dragged in front of a judge, so the more foolproof way would be to retain 51% control or dual-class shares. Once you give up majority control to third parties, you can't really prevent everyone else ganging up on you and outvoting you.
- HWR_14 3y ago
  It can work. The contract can specify controlling instead of owning 51%. And then you can have a fun lawsuit. Did the group persuade the 2% to vote their way or did they pay to control that 2%'s votes.
  - greesil 3y ago
    It's probably securities fraud.
- csomar 3y ago
  I think Beneficial Ownership bans this now and make it a criminal thing if you have control over an entity (regardless of ownership) and you don't declare that.
- JumpCrisscross 3y ago
  > Can this ever work? The PR group can control the 2% without nominally owning it. Yes. In tight-control transactions, there are a number of mechanisms. Off the top of my head: specifying Board seats in the charter and requiring a supermajority or unanimity to change that. Voting rights agreements that delegate 51% of votes to one party. Turning all shares but two into non-voting shares, the two having 51% and 49% of the votes. Making transferred shares convert to non-voting. Transfer approvals.
pyuser583 3y ago
Having 51% control guarantees nothing. I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power. His dad then sold the shares on the local stock exchange. A couple months later, his CEO/son was fighting a hostile takeover of the family-run, but publicly traded company. So his son bought the 51% from the local stock exchange, thinking he had a majority. The guy who owned the actual voting shares showed up at the annual shareholder meeting with attorneys and accountants , a small number of shares, and walked out with the keys to the company.
- BonoboIO 3y ago
  Well ... how could you not inform yourself with that much money at stake.
  - ben_w 3y ago
    Both legitimate mistakes and arrogant hubris are common enough, as are those who feel good about finding loophole, mistakes, and blind spots, and exploiting them. Musk, for example, seems to me from what he says to enjoy exploiting the blind spots of other businesses; but he was counter-exploited into buying Twitter for way too much.
- hn_throwaway_99 3y ago
  > I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power. You are either leaving out some important details or this is just not accurate. When people say you need to have "51% of shares" to control a company it means that you need to control 51% of voting rights of shares (sometimes different share classes have different voting rights). It would simply have been impossible for "his retired dad to have deprived the 51% shares of their voting power" if his dad didn't have voting control. So something just doesn't add up in this story.
  - deleted 3y ago
    [deleted]
kypro 3y ago
How does that work? In this case wouldn't the individual with > 50% shares need to be diluted to < 50% for another party to acquire > 50% stake? And surely at the point of dilution the individual would realise they have < 50% shares and this was a risk? I guess what I'm confuse at is if you own 51% of the shares, unless you sell some of that or dilute your holding there will only ever be 49% stake that can be purchased by another party. Am I missing something?
- dspillett 3y ago
  > if you own 51% of the shares Your understanding is correct there. > Am I missing something? I think you are missing that there may be one or more third parties who also own a stake. A quick example (figures plucked from the air, not a real world case) might make it clear: Starting point: Founder 75%, Other(s) 25% -- New investor buys 49% from founder: Founder 26%, Other(s) 25%, New Investor 49% Founder no longer has overall control, but nor does the new investor Founder+Others can block the new investor if they all agree -- New investor buys 2% from elsewhere: Founder 26%, Other(s) 23%, New Investor 51% New investor now has overall control and can do pretty much what they like It should be obvious that this is a risk, so my sympathy is low. If the new investor promised that sort of thing wouldn't happen then it is a crappy thing to do, but the founder should know that in business very little which isn't written & signed is worth as much as the paper it isn't written on. This sort of thing happens all the time.

arcticbull 3y ago

I believe the usual path in this type of situation is to dual-class shares, so you can retain voting control while selling beneficial ownership to others. I suspect the PE group would have, you know, rejected this arrangement given their plan.

bonestamp2 3y ago
If they reject it because of their plan then the strategy worked, although it might not seem like a win to the Founder at the time.
worik 3y ago
> the usual path in this type of situation is to dual-class shares Is that still tolerated by investors? Is it still legal? "Having your cake and eating it" is a really bad attitude
- adastra22 3y ago
  It shouldn’t be tolerated nor legal, but it is.
  - csallen 3y ago
    What's wrong with it? If people want to be allowed to buy/sell second-class shares that don't have voting rights, then I don't see the problem with there being a market for that.
    - adastra22 3y ago
      It’s not a free market. Your options are buy the class of stocks that the company wishes to sell, or not participate at all. Therefore it can be aggressively abused to disenfranchise public shareholders who have no say in the creation of share classes in the first place. One important role of government is to set and maintain standards for listing on markets, so that customers are protected. An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote.
      - Kamq 3y ago
        > Therefore it can be aggressively abused to disenfranchise public shareholders who have no say in the creation of share classes in the first place. Elaborate on this, because I think I'm misreading it. It seems to me like shareholders, generally already have a vote. Converting those shares, from voting to non-voting, would be quite illegal (at the very least breach of contract) without shareholder sign-off. Which they probably wouldn't do... y'know... because they're the shareholders. What's being discussed is issuing different shares (with approval of the voting shareholders). And if you don't like that, you can... just not invest in that company. There are several other companies you can invest in if that's what you want. And if the companies that offer only non-voting shares dominate (probably being driven by the founders)... most investors would probably want that. Most investors are looking for a return first and foremost. > An example of such a rule would be that all publicly traded companies have equal voting rights across all share classes: one share, one vote. I agree that it's an example of such a rule. Do you have an argument for why it's a good rule?
      - bryanrasmussen 3y ago
        >It’s not a free market. Your options are buy the class of stocks that the company wishes to sell, or not participate at all. this is a pretty expansive definition of freedom, the freedom to buy unfettered options in a company.
        adastra22 3y ago
        I have no idea what you are talking about.
  - hn_throwaway_99 3y ago
    Why? I don't see any problem with dual class shares: 1. It's not like anything is being hidden - people who buy shares without (or with less) voting share rights know what they're getting, and can adjust the amount they're willing to pay for those shares accordingly. 2. Dual share is a double edged sword: if you believe and want a visionary founder to stay in control, you're good. At the same time, you should be clear that if the visionary founder goes off his rocker, there is not much people will be able to do to oust him. Zuckerberg pretty much shows these pros and cons perfectly. People were wringing their hands at the end of last year when Meta stock was in the toilet that there was nothing anyone could do to replace Zuckerberg. Now, though, Meta is up over 150% over the past year, and the fact that Zuckerberg could play a longer game and wasn't just ousted due to the share dip was probably ultimately good for investors.
- Centigonal 3y ago
  > "Having your cake and eating it" is a really bad attitude Ray Dalio says the following in his book Principles: “When faced with the choice between two things you need that are seemingly at odds, go slowly to figure out how you can have as much of both as possible. There is almost always a good path that you just haven't figured out yet, so look for it until you find it rather than settle for the choice that is then apparent to you.” He credits this approach to helping his firm spearhead risk parity as well as other successes. Sometimes, trying to have your cake and eat it too leads to being able to do just that.
  - xyzelement 3y ago
    100%. At an old job, I worked with an eng manager who believed software quality and time to market were mutually exclusive. You decide which one is important to you and you go for that one. In his thinking, he then constantly failed to identify options that were both fast to build and good, usually due to significant simplification. He could never find these things because in his mind you couldn't have both. Later on, I worked for Ray for a few years and would always think of this dude whenever I encountered this principle.
- martin8412 3y ago
  I don't know if you can still do it, but it's how Zuckerberg has retained control over Meta/Facebook. Zuckerberg and friends has 90% of the voting power, because the special class of shares has 10x voting power compared to regular shares.
colechristensen 3y ago
there are also “poison pill” provisions to prevent takeovers in various ways such as providing minority owners the ability to purchase stock at very steep discounts if a certain event is triggered

Cpoll 3y ago

> Not sure if regulations allow this, but to make it bullet proof they should have made a contract that the PR group will not go beyond 49%. Can this ever work? The PR group can control the 2% without nominally owning it.

scrollaway 3y ago
They don’t need to own the shares, they just need the shares to vote their way.
RandomBK 3y ago
The extreme case of this would be Poison Pills, so if that's allowed then I suspect you can contract for this as well. Having said that this is the type of thing that is likely to get dragged in front of a judge, so the more foolproof way would be to retain 51% control or dual-class shares. Once you give up majority control to third parties, you can't really prevent everyone else ganging up on you and outvoting you.
HWR_14 3y ago
It can work. The contract can specify controlling instead of owning 51%. And then you can have a fun lawsuit. Did the group persuade the 2% to vote their way or did they pay to control that 2%'s votes.
- greesil 3y ago
  It's probably securities fraud.
csomar 3y ago
I think Beneficial Ownership bans this now and make it a criminal thing if you have control over an entity (regardless of ownership) and you don't declare that.
JumpCrisscross 3y ago
> Can this ever work? The PR group can control the 2% without nominally owning it. Yes. In tight-control transactions, there are a number of mechanisms. Off the top of my head: specifying Board seats in the charter and requiring a supermajority or unanimity to change that. Voting rights agreements that delegate 51% of votes to one party. Turning all shares but two into non-voting shares, the two having 51% and 49% of the votes. Making transferred shares convert to non-voting. Transfer approvals.

pyuser583 3y ago

Having 51% control guarantees nothing. I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power. His dad then sold the shares on the local stock exchange. A couple months later, his CEO/son was fighting a hostile takeover of the family-run, but publicly traded company. So his son bought the 51% from the local stock exchange, thinking he had a majority. The guy who owned the actual voting shares showed up at the annual shareholder meeting with attorneys and accountants , a small number of shares, and walked out with the keys to the company.

BonoboIO 3y ago
Well ... how could you not inform yourself with that much money at stake.
- ben_w 3y ago
  Both legitimate mistakes and arrogant hubris are common enough, as are those who feel good about finding loophole, mistakes, and blind spots, and exploiting them. Musk, for example, seems to me from what he says to enjoy exploiting the blind spots of other businesses; but he was counter-exploited into buying Twitter for way too much.
hn_throwaway_99 3y ago
> I know a guy who had 51% in the family company. His retired dad had, in exchange for money, deprived the 51% shares of their voting power. You are either leaving out some important details or this is just not accurate. When people say you need to have "51% of shares" to control a company it means that you need to control 51% of voting rights of shares (sometimes different share classes have different voting rights). It would simply have been impossible for "his retired dad to have deprived the 51% shares of their voting power" if his dad didn't have voting control. So something just doesn't add up in this story.
- deleted 3y ago
  [deleted]

kypro 3y ago

How does that work? In this case wouldn't the individual with > 50% shares need to be diluted to < 50% for another party to acquire > 50% stake? And surely at the point of dilution the individual would realise they have < 50% shares and this was a risk? I guess what I'm confuse at is if you own 51% of the shares, unless you sell some of that or dilute your holding there will only ever be 49% stake that can be purchased by another party. Am I missing something?

dspillett 3y ago
> if you own 51% of the shares Your understanding is correct there. > Am I missing something? I think you are missing that there may be one or more third parties who also own a stake. A quick example (figures plucked from the air, not a real world case) might make it clear: Starting point: Founder 75%, Other(s) 25% -- New investor buys 49% from founder: Founder 26%, Other(s) 25%, New Investor 49% Founder no longer has overall control, but nor does the new investor Founder+Others can block the new investor if they all agree -- New investor buys 2% from elsewhere: Founder 26%, Other(s) 23%, New Investor 51% New investor now has overall control and can do pretty much what they like It should be obvious that this is a risk, so my sympathy is low. If the new investor promised that sort of thing wouldn't happen then it is a crappy thing to do, but the founder should know that in business very little which isn't written & signed is worth as much as the paper it isn't written on. This sort of thing happens all the time.