What Is Control Stock and Who Is a Control Person?

Control stock refers to shares that grant an individual or group significant influence over a company’s management and policies. This concept implies a level of power to direct or cause the direction of the enterprise. Understanding control stock is important for investors, as it carries specific implications for ownership and transfer.

Defining Control Stock and Control Person Status

Control stock is a status applied to shares that provide the holder with the ability to direct or influence a company’s management and policies. These shares are held by a “control person,” also known as an “affiliate.” An affiliate is defined as someone who, directly or indirectly, possesses the power to influence or direct a company’s management and policies, whether through ownership of voting securities, contract, or other means.

Indicators of control include holding a position as an executive officer or director, or being a major shareholder. This status is about the ability to exert influence over corporate decisions, not necessarily requiring majority ownership. The significance of this status lies in the special rules that govern its sale, which differ from those applicable to ordinary shares.

How Control is Determined

Determining who qualifies as a “control person” is based on a “facts and circumstances” analysis rather than a rigid numerical threshold. The Securities and Exchange Commission (SEC) relies on a broad interpretation of “control,” focusing on actual influence rather than just formal titles or strict ownership percentages.

While no specific percentage guarantees control, owning a significant portion of voting shares (e.g., 10% or more) suggests potential for control, especially when combined with other factors. Even ownership of less than 10% can indicate control if no other individual holds a larger stake. Officers (e.g., CEO or CFO) and directors are considered control persons due to their direct influence over company operations and policy. Immediate family members of control persons may also be deemed control persons due to their close association and potential for indirect influence. Contractual arrangements, like shareholder agreements or voting trusts, can also confer control even without direct ownership.

Implications of Control Stock Ownership

Special rules apply to the sale of control stock to safeguard public investors. This is because sales by insiders could potentially be based on non-public information, which might unduly affect the market. The Securities and Exchange Commission (SEC) established Rule 144 to regulate the resale of control and restricted securities, aiming to prevent market manipulation and ensure transparency.

When a control person sells control stock in public companies, the transaction is subject to specific resale restrictions. Such sales require registration with the SEC or must meet the conditions of an exemption outlined in Rule 144. Common conditions for exempt sales under Rule 144 include volume limitations, which restrict the amount of shares a control person can sell within a three-month period to the greater of 1% of the outstanding shares or the average weekly trading volume over the preceding four weeks. There is also a requirement for current public information about the company to be available. Control persons also bear fiduciary duties to the company and its shareholders, meaning they must act in the company’s and all shareholders’ best interests, not solely their own. Transactions involving control persons or control stock face increased scrutiny from regulators and other shareholders.

Control Stock vs. Restricted Stock

Control stock and restricted stock are distinct concepts, though a single share can be both. Restricted stock refers to unregistered securities acquired from the company or an affiliate, usually in a private transaction, not on the open market. Its restricted nature stems from how it was obtained, meaning it cannot be freely resold in the public market until specific conditions, such as a holding period, are met or it is registered.

In contrast, control stock refers to shares held by an “affiliate” or “control person,” irrespective of how they were acquired. Its “control” nature arises from the status of the holder and their ability to influence the company.

• A share can be both control and restricted if an affiliate acquires unregistered stock directly from the company.
• A share can be control but not restricted if an affiliate purchases registered shares on the open market.
• A share might be restricted but not control if a non-affiliate acquires unregistered stock from the company.
• A share is neither control nor restricted if a non-affiliate buys registered shares on the open market.

Different rules and considerations apply depending on whether stock is control, restricted, or both, particularly concerning its resale.