What Does Change of Control Mean?
The change of control, or acquisition, of an entity is defined as:
- Any change in the entity ownership occurring when any person or company, directly or indirectly, becomes the beneficial owner of voting equity shares of the entity (to the extent of more than 50 percent of the voting shares) or the rights to acquire such shares;
- Any direct or indirect sale or transfer of substantially all of the assets of the entity;
- A plan of entity liquidation or an agreement for the sale on liquidation is legally approved and completed; and
- The board or empowered managing committee determines and declares that a change of control has occurred, irrespective of any occurrences described above.
A change of control of an entity impacts all stakeholders, namely:
- All shareholders, including minority positions;
- Debenture holders and lenders, particularly unsecured lenders;
- Senior executives, unless their agreements protect them against any arbitrary changes in terms or service conditions; and
- The applicable regulatory environment.
Divestopedia Explains Change of Control
A company's change of control often occurs due to the selling of its shares, either in the open market or through a private transaction at an agreed price. This can also occur through a primary market route when additional shares or rights shares are allotted to, and paid for by, existing shareholders or outsider applicants. This can also occur due to the conversion of a convertible portion of debentures or bonds, or any planned arrangement provided in an agreement for future transfer of shares.
A change of control may imply the sale or acquisition of the whole, or a substantially complete part, of all the assets of an entity due to a complete merger, demerger, restructuring, acquisitions transacted between any individuals and/or corporate entities, or any change in the ownership of more than 50 percent of the voting shares of the entity (in one or a series of related transactions). The acquisition of a controlling stake in a listed company is subject to various regulations of companies and listing agreements, disclosure requirements and rules of boards of security exchanges.
In some countries, senior executive employment contracts contain a change in control provision, which provides enhanced protection against arbitrary termination when a different owner takes over the management control of a company.