What Is a Control Person and Why Does It Matter?
Understand what a control person is, how they're identified, and why this designation carries significant implications in business and finance.
A “control person” is a term that appears across various business and financial contexts, particularly within securities regulations. Understanding this designation is important because it dictates specific obligations and limitations for individuals or entities. This concept extends beyond simple majority ownership, encompassing a broader scope of influence over a company’s operations and decisions.
Defining a Control Person
A control person is an individual or entity possessing the power to direct or cause the direction of the management and policies of a company. This power can arise through ownership of voting securities, contractual agreements, or other means. The definition emphasizes effective influence rather than requiring a majority ownership stake. The Securities and Exchange Commission (SEC) defines “control” as the possession, direct or indirect, of the power to direct or cause the direction of management and policies of a person, whether through voting securities, by contract, or otherwise. This definition applies across different legal contexts, including the Securities Act of 1933.
The determination of control relies on a comprehensive assessment of facts and circumstances surrounding an individual’s relationship with a company. It is not limited to holding a specific percentage of shares. While a substantial shareholding can be a strong indicator, control can also exist through other avenues. The concept aims to capture those who, regardless of formal titles or direct ownership, can genuinely influence the strategic direction and daily operations of an entity.
Indicators of Control
Several factors commonly indicate whether an individual or entity qualifies as a control person. Significant stock ownership is a primary consideration, even if it does not constitute a majority stake. For example, owning 10% or more of a class of voting securities can lead to a presumption of control in some contexts. Holding less than 50% of shares can still signify control if it grants significant influence over the company’s operations, officers, directors, or other stakeholders.
Holding key executive positions, such as Chief Executive Officer or Chief Financial Officer, implies control due to the inherent authority to direct company affairs. Serving on the board of directors, especially in influential roles, can also be an indicator. Beyond formal roles, contractual rights that confer influence, such as veto power over major decisions or the ability to appoint a majority of board members, contribute to a determination of control. Close family relationships with other control persons or key executives can also be considered in assessing a controlling group.
Significance of Control Person Status
The designation of “control person” carries specific obligations, primarily under federal securities regulations. These rules aim to ensure transparency and prevent misuse of inside information. Control persons are subject to limitations when selling company stock, most notably under Rule 144 of the Securities Act of 1933. This rule provides a “safe harbor” exemption for the public resale of restricted and control securities, provided certain conditions are met.
Under Rule 144, control persons, also known as affiliates, must adhere to volume limitations when selling equity securities. During any three-month period, the number of shares sold cannot exceed the greater of 1% of the outstanding shares of the same class or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale. For over-the-counter stocks, only the 1% measurement applies. Sales must also be conducted through unsolicited broker transactions or directly with a market maker.
Control persons are also subject to reporting obligations under Section 16 of the Securities Exchange Act of 1934. This section requires directors, executive officers, and principal shareholders (those holding more than 10% of a class of equity securities) to report their transactions in company stock. Upon becoming an insider, a Form 3 must be filed to disclose initial holdings within 10 days. Any subsequent changes in holdings or transactions, such as purchases or sales, must be reported on Form 4 within two business days of the transaction date. Form 5 is filed annually to report certain exempt transactions or those not previously reported.