Control Premium

What does control premium mean?

Control premium (in German, Kontrollprämie) is the surcharge per share that an acquirer pays above the value of a minority holding because the acquisition gives it control over the company. A minority holding means a stake without influence on management; the term block premium (Paketzuschlag) is also used. The reference value for listed companies is the share price before the offer became known; for unlisted companies it is the proportionate equity value from the viewpoint of a shareholder without decisive influence.

Formula: Control premium in % = (price per share with control − value per share without control) ÷ value per share without control × 100

The control premium appears in takeovers of listed companies, in the majority acquisition of a GmbH (German limited liability company) and in company valuation. It explains why a share can be worth different amounts depending on its size and influence. Whoever acquires the majority buys, besides the share in the result, the right to decide on strategy, management and use of profit. It appears as a separate item in no contract; it follows from the price that the parties set in the purchase agreement or the takeover offer.

What the value of control is based on

In a GmbH, the majority of the votes cast (Section 47(1) of the German Limited Liability Companies Act, GmbHG) decides the material questions of the shareholder body. These include the appointment and removal of managing directors, the adoption of the annual financial statements and the use of the result (Section 46 nos. 1 and 5 GmbHG) as well as instructions to the management (Section 37(1) GmbHG). The majority shareholder thus determines whether profits are distributed or retained, how the company is financed and whether it is integrated into a group of companies.

Value arises from these rights when the acquirer can run the company differently from before: through cost reductions, different financing, combination with its own businesses or a changed distribution policy. For a strategic buyer, synergies are added that can be realised only with control. The premium observed in a transaction therefore mixes several sources: the value of the steering rights, expected synergies and competition among bidders.

Control is more than the capital majority

Whether a holding actually conveys control depends on the articles of association and the shareholders' agreement. Amendments to the articles of association and capital increases require three quarters of the votes cast under Section 53(2) GmbHG; whoever holds more than a quarter has a blocking minority (supermajority vote). Approval reservations in favour of investors (veto rights) can additionally prevent a majority shareholder from resolving material measures alone. An acquirer pays a premium only to the extent that it actually receives these powers.

Control premium, minority discount and marketability

The flip side of the control premium is the minority discount (discount for lack of control, DLOC). A share without influence on management and use of profit is worth less to a third party than the arithmetical share in the value of a controlled company. The two variables are mathematically linked. A premium of 12.5% corresponds to a discount of about 11.1%.

Formula: Minority discount = 1 − 1 ÷ (1 + control premium)

To be distinguished from this is the marketability discount for restricted tradability (discount for lack of marketability). Shares in a GmbH can be transferred only by notarial recording (Section 15(3) and (4) GmbHG). The articles of association can make assignment subject to consent (Section 15(5) GmbHG). There is no market with ongoing prices. This discount also affects majority stakes and is independent of the question of control.

In valuations for statutory reasons, such as compensation under the German Stock Corporation Act or the German Transformation Act, German practice in principle derives the value of a share proportionately from the total value of the company. Premiums for control and discounts for lack of influence are generally disregarded there. In a free sale, by contrast, supply and demand determine whether and in what amount a premium is paid.

Takeover offers for listed companies

The control premium is most clearly measurable for listed stock corporations: as the difference between the offer price and the share price that applied before the offer became known. For companies whose shares are admitted to an organised market, the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WPÜG) applies. It defines control as holding at least 30% of the voting rights (Section 29(2) WPÜG). Whoever obtains control must in principle make a mandatory offer to all other shareholders (Section 35 WPÜG).

Minimum rules apply to the price (Section 31 WPÜG in conjunction with the WPÜG Offer Ordinance). It must not fall below the weighted average share price of the last three months before publication. At the same time, it must not be lower than the highest price that the bidder paid or agreed for shares in the target company in the six months before. If an acquirer pays a large shareholder a premium for its block in this period or during the offer, it must therefore in principle also offer it to the other shareholders. In this way, the premium for control is spread across all shareholders.

Control premium in a sale process and funding round

In the sale of all shares in a GmbH, control is included in the price; a separate premium is not shown. It becomes visible in a comparison with minority prices, such as the price per share in the last funding round. This comparison is only of limited value, because in a funding round investors acquire, besides the share, preferential rights such as liquidation preferences, which influence the price per share.

In a majority sale with remaining co-shareholders, the question arises who shares in the premium. Without contractual regulation, the majority shareholder can sell its shares at a price that is not offered to the minority shareholders. A tag-along right (tag-along right) secures the minority the right to sell along on the same terms. A drag-along obligation (drag-along) conversely allows the majority to deliver all shares to an acquirer who pays a control price only for 100%.

In a funding round, investors acquire minority holdings and pay no control premium. Extensive approval reservations can nevertheless take part of the steering away from the founders without any surcharge being paid for it. Economically, it should therefore be examined which decisions remain possible after the round without the investors' consent.

Worked example: control premium in the majority sale of a GmbH

In a GmbH, shareholder A holds 60%, and shareholders B and C together hold 40%. If the existing concept is continued, that is, from the viewpoint of a shareholder without influence on management, the equity value is EUR 24.0 million. A strategic acquirer could, with control, reduce costs and add the product to its sales; from its viewpoint the company is worth EUR 29.0 million. It bids EUR 27.0 million for 100% of the shares.

• Control premium: (27.0 minus 24.0) divided by 24.0 = 12.5%
• Arithmetical minority discount on the offer value: 1 minus 1 divided by 1.125 = about 11.1%; check: EUR 27.0 million × (1 minus 0.111) = about EUR 24.0 million
• Upper limit from the acquirer's viewpoint: 29.0 minus 24.0 = EUR 5.0 million, which corresponds to a premium of about 20.8%; at the offer of EUR 27.0 million, EUR 2.0 million of the added value remains with it
• Sale of all shares: A receives 60% of EUR 27.0 million = EUR 16.2 million, B and C together receive EUR 10.8 million
• Acquisition of only A's shares at the same price per percentage point: A still receives EUR 16.2 million. B and C remain minority shareholders under a new majority shareholder; their stake is worth at most 40% of EUR 24.0 million = EUR 9.6 million
• With a tag-along right on the same terms, B and C can sell along for EUR 10.8 million; the difference of EUR 1.2 million is their share of the control premium

Negotiation thus concerns two questions: how much of the added value of control the acquirer gives up, and whether only the majority shareholder shares in it or all shareholders do.

Distinctions: control premium, synergies and goodwill

• Synergies: value contributions that only a particular acquirer achieves by combining with its business. They are a possible source of the premium but not the premium itself.
• Change of control: the event of a change of control to which contracts attach legal consequences, such as termination rights. The control premium, by contrast, is a price measure.
• Takeover premium: the observed surcharge of a takeover offer on the share price. Besides the value of control, it also contains synergies and bidder competition.
• Goodwill: the residual item in the acquirer's consolidated financial statements after a business combination, that is, the part of the purchase price that exceeds the revalued net assets. A control premium paid generally ends up there.

Common mistakes

• Flat percentage. A control premium applied at a fixed rate without reference to concrete measures of the acquirer cannot be substantiated and is open to attack in negotiation.
• Capital share equated with control. Approval reservations, blocking minorities and voting agreements can considerably restrict a majority holding.
• Double counting. If a valuation already contains the improvements that the acquirer wants to implement with control, a control premium must not be added on top.
• Unsuitable valuation benchmarks. Stock market multiples are based on prices at which individual shares without influence are traded, transaction multiples (precedent transactions) on majority acquisitions. Anyone who mixes them distorts the valuation.
• Tag-along right without price equality. If the clause secures only participation in the sale but not the same price per share, the minority remains excluded from the premium.

Frequently asked questions

How high is a control premium usually?

There is no generally valid level. It depends on which measures the acquirer can implement with control, how many bidders compete and which starting value is used. As a rough rule of thumb, takeover offers for listed companies are often 20 to 40% above the undisturbed share price. This range, however, also contains synergies and bidder competition and does not replace an examination of the individual case.

How is the control premium calculated?

As the percentage surcharge of the price with control over the value without control. With an offer of EUR 27.0 million and an equity value from the minority viewpoint of EUR 24.0 million, it is 12.5%. For listed companies, the undisturbed share price is the starting value.

Do minority shareholders also receive the premium when the majority is sold?

Only if a rule provides for it. For listed companies, the mandatory offer and its minimum price rules ensure this. For a GmbH, tag-along rights and equal treatment clauses in the shareholders' agreement are what matter.

At what holding does a shareholder have control in a GmbH?

As a rule, from more than half of the voting rights. The shareholder then decides the ongoing shareholder resolutions, such as on management and the use of profit. For amendments to the articles of association and capital measures, three quarters of the votes cast are needed, and the articles of association or shareholders' agreement can provide for further approval rights.

The Roemer Capital view

In majority sales with remaining co-shareholders, we first examine the articles of association and the shareholders' agreement. The questions are whether tag-along rights secure the same price per share, which approval reservations the acquirer takes on and whether a drag-along obligation allows the delivery of all shares. Whether an acquirer pays for control, and who benefits from it, depends on this.

We do not derive a control premium from average values but from the measures that a particular acquirer can implement with control. In funding rounds, we classify approval reservations economically so that founders know which steering rights they give up at what price.