A control premium is the amount by which the market price of shares is exceeded by the price paid to buy enough shares to take control of a business. Buying outright control typically requires buy a majority of ordinary shares, but it is possible to get effective control of listed companies with a smaller shareholding because many shareholders do not vote (at AGMs and EGMs). This is why most regulations(such as the Takeover Code) require buyers of stakes that fall short of outright control to make an offer to buy the shares of remaining minority shareholders.
Estimating the value of control premiums is necessary when valuing large blocks of shares. The size of the control premium varies from industry to industry, with the size of the company. Some buyers may also be willing to pay much more for control(for example, a trade buyer buying out a key competitor).
The reasons buyers are willing to pay for control are closely linked to the reasons that non-voting shares trade at a discount. Some of reasons are benign from the point of view of other shareholders:
- the ability to integrate a business with another so as to benefit from synergies,
- vertical integration to secure supplies or buyers,
- to replace bad management.
Vertical integration to secure relationships may not be so good if the benefits are one-sided or if it raises transfer pricing issues. Other uses of control that might harm minority shareholders are those of the appointment of directors and dealing with businesses connected to the controlling shareholder. We discuss these in more detail in the context of non-voting shares.