Principal Shareholder

What Is a Principal Shareholder?

A principal shareholder is a person or entity that owns 10% or more of a company's voting shares. The company can be private or publicly traded, meaning the shares trade on an open exchange, such as the New York Stock Exchange (NYSE). A principal shareholder is different from a majority shareholder or majority stakeholder, which is a person or entity that owns 50% or more of a company's voting shares.

Principal shareholders are subject to special Securities and Exchange Commission (SEC) filing rules that pertain to insider trading. Investors often monitor principal shareholder trading activity since it can be an indication of the company's financial performance.

Key Takeaways

  • A principal shareholder is a person or entity that owns 10% or more of a company's voting shares.
  • Principal shareholders have significant influence over a company, allowing them to vote on appointing the (CEO) and board of directors. 
  • A principal shareholder is different from a majority shareholder, which is a person or entity that owns 50% or more of a company's shares.
  • Principal shareholders are subject to special Securities and Exchange Commission (SEC) filing rules that pertain to insider trading.

Understanding a Principal Shareholder

A principal shareholder is a person that directly or indirectly owns or controls more than 10% of any class of voting shares or securities of a company. The principal shareholder has the authority to vote using those voting shares. As a result, a principal shareholder has a significant amount of influence over the company.

Principal shareholders can also influence other investors' buying or selling interest in the company's stock. For example, if the principal shareholder makes a sizable additional investment in the company, it can indicate that it is performing well. Conversely, if a principal shareholder sells a significant amount of the company's shares, it may lead other investors to sell their shares since they might expect that the company's financial performance is deteriorating. A principal shareholder can also be known as a principal stockholder.

Board of Directors

A principal shareholder's voting shares allow the shareholder to vote on who should be the Chief Executive Officer (CEO) or who would sit on the company’s board of directors

A board of directors is a group of individuals that are elected to represent shareholders. Typically, the board is tasked with appointing the CEO or executive management at the company and establishing corporate governance policies. All publicly-traded companies must have a board of directors and some private and nonprofit corporations also have a board. 

Principal Shareholders in Management

In some cases, there can be more than one principal shareholder, and the list can include the CEO, President, or founder. This is common since the individual or family, which founded the company, may insist on maintaining some control over the company's shares, allowing them to dictate the direction of the business.

Requirements of Principal Shareholders

A principal shareholder is considered a "business insider" by the Securities and Exchange Commission (SEC) due to their large stake in the company, which is over 10% of voting shares.

Transaction Reporting

As a result of the business insider status, the Securities and Exchange Commission (SEC) requires principal shareholders to file reports with the SEC regarding any buying and selling of their shares within two business days of the activity. This requirement falls under Section 16 of the Exchange Act and is meant to help screen for suspicious insider trading activity.

The rules require the insiders to report many equity security transactions to the SEC within two business days. Principal shareholders are required to file most of their transactions through the SEC via an Initial Statement of Beneficial Ownership (SEC Form 3), Statement of Changes in Beneficial Ownership (SEC Form 4), and the Annual Statement of Changes in Beneficial Ownership (SEC Form 5).

Short Selling

Principal shareholders are prohibited from short-selling the company's stock or securities as stipulated under Section 16 of the Exchange Act. Short selling is the process of borrowing securities from a broker and then selling them in the open market, with the expectation that the stock price will fall. Once the price has fallen, the short seller would buy the shares at the lower market price and earn a net gain.

Principal Shareholder vs. Majority Shareholder

While a principal shareholder holds 10% of shares, a majority shareholder is a person or entity that owns and controls more than 50% of a company's outstanding shares. In some cases, a majority shareholder is the company's founder or a descendant of the founder within a family-owned business.

A majority shareholder has much more influence over a company versus a principal shareholder, particularly if the shares are voting shares. In other words, when a majority shareholder has voting rights, they can significantly impact the direction of the company. Since the majority shareholder has more than 50% ownership, they can replace the CEO, management team, or the board's members.

Private Companies

However, not all companies have a principal or majority shareholder. Typically, a private company—meaning they don't have publicly traded shares—would be the most likely to have a majority shareholder. Also, some majority or principal shareholders may not be involved in the day-to-day operations of the business. For example, family members of a company might own a significant amount of shares but allow appointed executives with more expertise in that industry to manage the company.

Responsibilities

With any significant ownership or sway over a company, these individuals have a responsibility to act in the best interests of the other shareholders. In other words, they should act in good faith, not engage in fraudulent activity, and apply the company's assets and cash appropriately.

The Bottom Line

A principal shareholder is a person or entity that owns 10% or more of a company's voting shares. As a result, they can influence a company's direction by voting on who becomes CEO or sits on the board of directors. Not all principal shareholders are active in a company's management process. However, if a principal shareholder exerts influence, the actions should be in the best interest of the corporation and the other shareholders.

Article Sources

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  1. U.S. Securities and Exchange Commission. "Officers, Directors, and 10% Shareholders." Accessed Nov. 17, 2021.