Mat says:- Beware the UBO 25% (10%) control misconception

I have just read a LinkedIn post that said:-

• 𝗨𝗕𝗢 is the natural person at the top, the actual beneficiary or controller, who typically owns 25% or more of the company.

In my view

• The statement is problematic if not misleading because it implies that ownership of 25% or more is a universal requirement for UBO status, ignoring these alternative control structures.
• Regulatory frameworks typically account for this by defining UBOs as individuals with either significant ownership or effective control, but the statement omits the latter.

I want to clarify, analyse, and provide an illustrative example to address this.

Why the Statement Is Problematic

The statement’s focus on “typically owns 25% or more” ignores these nuances. It fails to account for:

1. Voting Rights Disparities: share classes can amplify control beyond ownership percentages (see below).
2. Other Control Mechanisms: Contracts, board influence, or proxies can confer UBO status without significant ownership.
3. Jurisdictional Variations: Some jurisdictions use lower thresholds (e.g., 10%) or qualitative criteria (e.g., “significant influence”) to identify UBOs.

Regulatory Context

Where does the misunderstanding start? Let’s align with regulatory standards:

• FATF Recommendations: Define UBO as a person who owns or controls a company, including through voting rights or other means, not strictly tied to a 25% threshold.
• EU 4th/5th AMLD: A UBO is someone with >25% ownership or control through other means, such as voting rights or significant influence.
• Practical Application: Regulators often require companies to disclose UBOs based on both ownership and control, with due diligence to uncover complex structures like dual-class shares.

Clarification and Analysis

• Therefore, according to the above, A UBO is typically defined as a natural person who ultimately owns or controls a legal entity,
• Often through ownership of a significant percentage of shares (commonly 25% or more) or
• Other means of control, such as voting rights, board influence, or contractual arrangements.
• Therefore, Control can be exercised with fewer shares if share classes or other mechanisms grant disproportionate influence.

Beware structuring share classes

• Companies can issue different classes of shares (e.g., Class A, Class B) with varying voting rights. For example,
• A person holding a small percentage of total shares (e.g., 5%) could control the company if their shares carry ENHANCED VOTING POWER (e.g., 10 votes per share compared to 1 vote per share for others).
• This is common in tech companies like Meta or Alphabet, where founders retain control despite owning a minority of total equity.
• Other mechanisms can also confer control without significant ownership. Like
• Shareholder agreements or
• Veto rights,

Illustrative Example

Let’s consider a fictional company, TechTrend Inc., to illustrate how share class structuring can affect UBO identification:

• Ownership Structure:
• Total shares: 100,000
• Class A shares: 90,000 (1 vote per share, owned by public investors)
• Class B shares: 10,000 (10 votes per share, owned by the founder, Alice)
• Alice owns 10% of the total shares (10,000 / 100,000).
• Voting power:
• Public investors: 90,000 votes (90,000 × 1)
• Alice: 100,000 votes (10,000 × 10)
• Alice controls 52.6% of the voting power (100,000 / 190,000 total votes).
• UBO Analysis:
• Based on ownership alone, Alice’s 10% shareholding falls below the 25% threshold, so she might not be flagged as a UBO under a simplistic ownership-based definition.
• However, her 52.6% voting power gives her effective control over corporate decisions (e.g., board appointments, foremost transactions).
• Under most regulatory definitions (e.g., FATF or EU AMLD), Alice would be considered a UBO due to her control via voting rights, despite owning less than 25%.
• Additional Control Mechanisms:
• Suppose Alice also has a shareholder agreement granting her veto power over key decisions (e.g., mergers or asset sales). This further solidifies her status as a UBO, even if her voting power were lower.
• Alternatively, if Alice appoints a trusted CEO who acts on her instructions, she could exert control indirectly, though this might require deeper investigation to establish her as the UBO.

Alice is the UBO

1. In the example of TechTrend Inc., Alice is the UBO despite owning only 10% of shares, due to her 52.6% voting control.
2. Always consider both ownership and control when assessing UBO status, as regulations prioritise effective influence over rigid thresholds.

Real-World Company Share Structure Analysis: Meta Platforms, Inc.

• To illustrate how share structures can impact UBO identification, let’s analyse Meta Platforms, Inc. (formerly Facebook), a publicly traded company known for its dual-class share structure.

Share Structure Overview

• Class A Shares: Publicly traded, each carrying one vote per share. As of recent filings, approximately 85% of Meta’s total shares are Class A, held by institutional and retail investors.
• Class B Shares: Held primarily by founder Mark Zuckerberg and select insiders, each carrying 10 votes per share. These represent about 15% of total shares but control a majority of voting power.
• Ownership Example:
• Mark Zuckerberg owns approximately 13% of total shares (mostly Class B), equating to roughly 55% of voting power due to the 10:1 voting ratio.
• Institutional investors (e.g., Vanguard, BlackRock) hold significant Class A shares but have limited voting influence due to single-vote shares.

UBO Identification

• Ownership Analysis: Zuckerberg’s 13% shareholding is below the 25% threshold commonly used in UBO regulations. However, his 55% voting power, derived from Class B shares, grants him substantial control over corporate decisions, such as board appointments and strategic policies.

Challenges in UBO Identification

• Complex Share Classes: The dual-class structure obscures control, as ownership percentages alone don’t reflect voting power. Regulators must analyse voting rights agreements to identify the UBO.
• Global Operations: Meta operates in multiple jurisdictions, each with different UBO thresholds (e.g., 25% in the EU/US, 10% in India). Compliance requires tailored reporting per jurisdiction.
• Verification Needs: Regulators may require shareholder agreements, board minutes, or voting records to confirm Zuckerberg’s control, as public filings may not fully disclose Class B share impacts.

Conclusion

• The 25% statement in my introduction is incomplete and potentially misleading because it emphasises ownership over control.
• You should also be concerned about share class structuring, as it is valid—someone with minimal shares can indeed be a UBO if they hold disproportionate voting power or other control mechanisms.
• The case of META demonstrates that UBO identification extends beyond ownership percentages. Regulatory frameworks globally recognise control mechanisms like enhanced voting rights, as seen in Zuckerberg’s 55% voting power despite 13% ownership.