Depending on the public company, the insider ownership situation can be simple or very complex. Publicly traded corporations can divvy up ownership through 1 class, or multiple classes of shares, and can designate these classes as voting or non-voting.
Companies with active founders can sometimes structure their share classes in this way in order to retain control of a company while still accessing vast amounts of capital through the public markets.
While insider ownership (and transactions) in the traditional sense may refer to management and their relative ownerships of a company, the ownership situation of major holders of the stock can sometimes be much more impactful than management’s ownership themselves.
For example, if a founder retains majority control of his company after going public, he can effectively control major decisions of the company that are usually voted on by shareholders by proxy. This can include things like:
- Who management will be.
- Whether a company will make an acquisition or not.
- Whether a company will allow themselves to be acquired or not.
- What management compensation will be.
- The initiation of special dividends or buybacks.
But, majority voting control of a company doesn’t always mean complete control of every aspect of a business—especially if the owner decides to hire someone else for other major company decisions such as a CEO, CFO, or COO.
With all of this in mind, this post will discuss insider ownership in the sense of company control. I’ll show how to easily research the ownership structure of any public corporation you are interested in.
Important Considerations about Insider Ownership
But remember, investigating insider ownership isn’t meant to solely direct investors towards a decision of whether to buy or sell a stock. Rather, it’s one piece of the bigger picture, and can be a factor among the many others to consider when analyzing a company—especially when there are major changes in insider ownership.
Also, remember the limitations of investigating insider ownership.
While it tells you the people who are in control, it can’t predict the future—as we can’t predict human beings and their intentions and decisions in a constantly changing world. People often consider and change priorities and involvement in their work throughout their lives, and ownership control of a company has its own inherent limitations as well.
Before we really dive in, we’ll need to know a few basics. First, there’s a lot of legal jargon in the documents we’ll look at here. I’ll try to define those here.
Legal Terms About Share Ownership To Understand
Please note that I am not a corporate lawyer, but instead am a nerd about everything stock market and business. The following are not official definitions, but rather the way I interpret these legal terms as they are written today:
- Sole voting power: power to vote
- Shared voting power: power to vote shared with others (such as an investment manager or company acting on behalf of multiple owners)
- Sole dispositive power: power to buy or sell shares
- Beneficial ownership: someone who is an owner of shares but doesn’t necessarily have their name on ownership documents
- Disclaim beneficial ownership: relinquish the benefits of beneficial ownership
- Schedule 13D or 13G: required documents for an investment manager and/or parent company with beneficial ownership of 5%+ of a class of shares
We’ll go back to understanding these terms more precisely as we come across them in context of the various companies we’ll discuss here. I think this line of thinking is important with interpreting all forms of insider ownership. Try and understand the context of each situation, and combine what you find in the proxy statements with some other basic research (like a Google search), and basic common sense.
How to Pull Up Insider Ownership Disclosures from Public Documents
To pull up information about company ownership for a public corporation, you’ll need to navigate to the DEF 14A.
Go to sec.gov and enter the ticker of the company you want to investigate. I’m taking Disney ($DIS) for this example.
Then look for the Proxy statement—more specifically, the DEF 14A.
Note that many companies will have a DEF 14A and a DEFA14A, which are both proxy statements that typically disclose separate issues. I’ve found that the DEF 14A will disclose ownership structures and any major insider ownership situations, while the DEFA14A generally does not.
One way to quickly sort through all of the public documents on sec.gov is to simply type “def” into the Filing Type box at the top, to see all of the recently posted DEF 14A forms (and DEFA14A forms).
From there, you should see a Proxy Statement document with around 50-100 pages, give or take.
I like to search (“ctrl+f”) for the term “ownership”, to find insider ownership and major holders of classes of shares.
You can see right at the top that any “persons” with more than 5% of the outstanding shares of this class of stock (Disney only has 1 class) is disclosed in a table like this:
Instead of one owner exerting major control of this company, you really have a situation with many shareholders who can largely craft the direction of the company with their votes.
The mentions of Blackrock Inc and The Vanguard Group represent the many retail shareholders who own shares in the mutual funds (Blackrock) and ETFs (Vanguard and Blackrock) owned in the companies.
Scrolling down the page we can also see the extent that management owns Disney stock, as disclosed in this table:
In the case of Disney, every Director, nominee and named executive officer each owns less than 1% of the company, and is generally bound to the discretion of the Board of Directors and results of major proxy votes that can greatly impact the company’s direction.
Multiple Share Classes Example
As I hinted earlier, some companies are structured in order to allow a person (or persons) to essentially wield complete control over it, and shareholders still buy shares in these companies all the same.
A great example of this is the parent company of Google, Alphabet Inc, who has not only more than 1 class of shares but 3 total classes! Two are publicly traded GOOG and GOOGL.
This allows for the company to sell shares to the public while keeping the desires of the founders intact. It’s hard to know exactly what those desires might be until we look at the facts first.
Pulling up Alphabet’s Proxy Statement, we see the following tables:
Notice the disclosures about the different classes of shares:
“Each holder of Class B common stock is entitled to ten (10) votes per share of Class B common stock, and each holder of Class A common stock is entitled to one (1) vote per share of Class A common stock on all matters submitted to our shareholders for a vote.”
“Non-voting Class C capital stock is not included in the table.”
“The Class B common stock is convertible at any time by the holder into shares of Class A common stock on a share-for-share basis upon written notice to the transfer agent.”
To find out which Classes of shares are tied to which tickers, a trip to the Google machine (the irony of this was not intentional) tells us that Class A trades publicly as $GOOGL and non-voting Class C trades publicly as $GOOG.
The Class B super shares with 10 votes per share are not publicly traded, which helps co-founders Larry Page and Sergey Brin retain that voting control, while still allowing one of them (or any of their other trusted Class B owners) to easily cash out and relinquish control one day too (by converting Class B shares to Class A).
It seems from their class structure and current insider ownership situation that Larry and Sergey want to allow themselves complete voting control (with 26.1% and 25.1% Total Voting Power), while also allowing other special persons or organizations to sway the vote in case that Larry and Sergey disagree.
By keeping Class B as a special voting class with 10 votes per share, the company (owners) can choose which persons to allow to accumulate those shares and effectively influence company direction. But with Class C, the general public can still own shares but can’t generally influence the major company direction due to the non-voting nature of those shares.
It’s not a deceitful or a necessarily bad situation to have special insider ownership structures like this, but it’s up to investors to investigate whether their shares are voting or non-voting, and these publicly available official government Proxy documents insure that investors can investigate when this is the case for the shares they want to purchase.
Read the Fine Print of Ownership Structures
Let’s take current S&P 500 component News Corporation ($NWS), as an example of why you need to read the fine print, and why the simple statistics behind a company’s insider ownership might not be completely descriptive of the situation.
First, let’s skip to the company’s ownership table inside their proxy statement.
While it appears that the Murdoch Family Trust and K. Rupert Murdoch collectively own 77.8% (38.4%+ 39.4%), the footnotes should confirm this before we make assumptions.
Before doing that, note that the table explains that Class A shares are non-voting in this case, while Class B is the voting class. Further explanation is again in the footnotes of this ownership table in the proxy, explained in note (a) as:
“Beneficial ownership of Class A Common Stock and Class B Common Stock as reported in the above table has been determined in accordance with Rule 13d-3 of the Exchange Act. Unless otherwise specified, beneficial ownership of the Class A Common Stock represents sole investment power and ownership of the Class B Common Stock represents both sole voting and sole investment power.”
So in this case, the structure is flipped from a company like Berkshire Hathaway (where their voting shares are Class A rather than Class B.
Anyway, let’s highlight note (e) explaining the Murdoch Family Trust’s ownership, and note (g) explaining K. Rupert Murdoch’s ownership.
I’ve highlighted what I see here as most important. It looks like Cruden Financial Services LLC essentially owns the voting rights of the Murdoch Family Trust. We don’t get clarity on the ownership structure of Cruden Financial Services LLC (since they are a private company), but the note additional states that Mr. K. R. Murdoch has the power to appoint the board of directors for Cruden Financial Services, which implies that he owns a significant portion of this private company as well.
Interestingly, Mr. K. R. Murdoch disclaimed this apparent power, which is revealed at the end of the note. So the true voting power behind the 38.4% ownership stake of Murdoch Family Trust shares may lie with one person (like a first born son or daughter), or could be spread out between the family.
The disclosure of the disclaimed shares seems to imply that the company is not actually controlled solely by the Executive Chairman of the News Corp Mr. K. Rupert Murdoch even though the ownership table in the proxy statement makes it appear that way.
That may or may not be a favorable situation for the shareholder/ investor depending on how you interpret it.
Let’s look again at note (g) to complete the picture.
We can see here that the total number of shares of News Corp held by Mr. K. R. Murdoch includes the Murdoch Family Trust shares (and a substantial amount), meaning that the total ownership of Murdoch himself amounts to very few shares. Instead, his ownership of the company is through his proportional interest in the Murdoch Family Trust, which again is not publicly available information. Though he does also disclaim publicly even his ownership of the Murdoch Family Trust shares, he does also own Class B shares in the K. Rupert Murdoch 2004 Revocable Trust which it appears he doesn’t disclaim in this note.
Now that we’ve fully read the fine print for this ownership table, we understand that K. Rupert Murdoch doesn’t own 77.8% of the company, but rather 39.4% with the vast majority held through the Murdoch Family Trust (38.4%).
We also now know that he’s disclaimed many benefits usually associated with such a large relative accumulation of company shares, which may have something to do with his age (88), or not.
The ownership picture for News Corp is definitely a lot to take in, but this is more of a special case than is it the law of the land with public corporations.
Most are much more straight forward, at least that’s what I’ve seen with the companies I chose to investigate up to now.
Is Complex or Privately Shrouded Ownership Structure Bad to Invest in?
Though the ability of a private company like an LLC to own significant shares in a public corporation sometimes makes it hard for public investors to truly understand who owns or controls a business, the intentions behind crafting an ownership structure like this doesn’t have to always be nefarious.
Holding a large insider ownership position behind the secrecy of an LLC can keep owners anonymous in the public sphere, allowing those who wish to stay private to do so.
Understanding insider ownership is not some magical formula that will direct you to profitable investments every single time.
While there’s obvious statistics behind the insider ownership of public corporations, we have to remember that there are human beings behind these numbers. And human beings are never perfect, and a person with a seemingly perfect background can make mistakes or go through tough times—which can negatively impact decision making.
Remember too that there’s a difference between ownership and management. The two aren’t always synonymous.
And while an owner with voting control can effectively wield power over a corporation by assigning board members and making management decisions (like who the CEO should be), even these powers can be limited by the realities of the business world and the actions and decisions of the human beings behind it.
Don’t use insider ownership information as an absolute metric, but try to use common sense in interpreting it with other observable facts, like who founders or co-founders are and at what stage of life are they in.
As you analyze the ownership structure of a company, make sure you are combining this with other critical methods for investigating the business—such as reading the 10-k to learn the industry, business model, and financials powering it through each year.