ABSTRACT
Identifying the actual source(s) of control over a company is not a straightforward matter. States define what constitutes legal control for the purpose of assigning rights and obligations that arise from national laws and regulations, but while this satisfies an important practical objective it can fail to accurately reflect where control ultimately lies. Legal control is determined on the basis of what is visible or reported – the identities of registered owners of a company’s shares or parties for whom shares are formally held, the magnitude of ownership stakes or the names of individuals who are appointed as the company’s managers or who have legal authority to act in various ways on its behalf. There is much this information can hide, and if a party that is a source of control is intent on staying in the shadows in order to pursue its own objectives, legal or otherwise, it may well succeed. Consequently, state authorities and some company shareholders, as well as the company’s managers, employees and clients, may be unaware of the identities of the actors that ultimately determine the company’s conduct. As Julie A. Caswell observes, “information on direct control is insufficient in itself to assess the control a firm is under” because the true sources of control are often indirect and varied:
Firms operate in an environment made up of direct holders as well as other firms and institutions that may have financial or business relationships with the firm and may have board representation. As linkages between families and firms are assessed in the context of a network of relationships, control is clearly relative to how many actors are involved in a decision, the degree of their interest, and how much influence they are willing to exercise. The process of corporate decision making is, therefore, analogous to political decision making, where “interest groups” vie for control over corporate resources. It is also analogous in that certain parties to the decision may have the power necessary to determine the outcome regardless of opposition. A family-controlled firm with no debt, for example, may be able to make its decisions without consultation with other parties while a highly leveraged management-controlled firm may have its scope of action severely limited by loan covenants. 1
Indirect sources of control over a company and the amounts of control they wield, as well as the ways they apply their influence and their motives for doing so, reflect evolving situations 60and interests and can change in response to opportunities that arise. As states increasingly privatize the activities of governance, the inherent difficulty in accurately tracking the real sources of company control can have profound implications, not least with respect to state security. At any given moment, state authorities may have only limited knowledge about the enterprises they rely on for the continuance of divested functions.