Being in control of a company is extremely valuable as the dominant shareholder can determine the company's direction. If a controlling stake in a company is being sold, the major shareholders will expect to be paid a premium over the market price to reflect the benefit the buyer is gaining by acquiring control. This is known as the control premium.
On the other hand, buyers are willing to pay a control premium because they believe the value they can create as a result of gaining control will outweigh the premium paid. For example, the buyer may believe that it can turn around an underperforming company, or that the target company can offer efficiencies or additional revenue streams when combined with existing operations.
The amount paid varies due to factors such as the size, profitability and industry of the target company, the relative negotiating power of the parties, and market conditions. That said, several studies indicate the premium has historically averaged between 30 per cent and 50 per cent above the market price of a firm.
The Hong Kong Code on Takeovers and Mergers gives small shareholders a chance to exit and benefit from the control premium when there is a change in control.
If a buyer acquires more than 30 per cent of a listed company, it is obliged to offer to buy the rest of the shares at the highest price it paid for those shares in the previous six months, provided the buyer obtains more than half of the shareholding as a result of the offer.
One could also make an offer conditional upon getting a majority stake. However, associating control with specific shareholding levels has drawbacks. This assumes a majority shareholding is necessary for control, as a mandatory general offer is conditional upon the buyer becoming the majority shareholder.
This is not always the case. Li Ka-shing effectively controls Cheung Kong (Holdings) with a 43 per cent interest, and the Keswick family effectively controlled the Jardine Group for years with a less than 10 per cent holding in Jardine Matheson via cross-shareholdings with Jardine Strategic and control of the boards of both companies. (See 'A dizzying circle game' in last week's Money Post.)
