When a company is owned by another company, identifying the beneficial owners is not always as straightforward as looking at the share register. The corporate shareholder arrangement is only one part of a larger ownership structure that involves another company or trust.
For small-to-medium enterprise (SME) directors, these layered structures are common. A business may have a holding company above it, shareholders may use companies to hold their investments, or a group may have several entities for different commercial or succession-planning purposes. While these structures can offer commercial and financial benefits, they also require careful compliance management.
Regulatory frameworks administered by bodies such as the CIPC require companies to apply a look-through approach when determining beneficial ownership. This legal principle determines who ultimately controls the people and entities within a company with a layered ownership structure.
Understanding the “Look-Through” Rule
The legal framework behind beneficial ownership structures operates on a clear principle: a legal entity cannot be the ultimate beneficial owner. A beneficial owner must ultimately be a natural person.
If a company’s shares are held by another corporate entity, referred to as a holding company (HoldCo), directors cannot simply record HoldCo and stop there. They must trace the ownership chain through the operating entities to identify the individuals who ultimately hold the beneficial interest or exercise effective control.
How to Trace Indirect Ownership: A Practical Calculation
Where ownership passes through more than one company, indirect beneficial interest can be calculated by multiplying ownership percentages by the HoldCo ownership percentage at each level of the structure.
For example, if HoldCo owns 70% of the operating company, and Person A owns 60% of HoldCo, Person A has an indirect 42% economic interest (60% × 70%).
Person A would therefore exceed the 5% threshold and would need to be considered for disclosure as a beneficial owner of the operating company, subject to the applicable beneficial ownership requirements.
Where ownership passes through several entities, the same principle is applied across each layer of the ownership chain. However, percentage ownership is not the only consideration: beneficial ownership can also exist through voting rights, board appointment rights, or other forms of effective control.
Navigating Control Beyond Shares
A common pitfall for SME directors is focusing purely on equity calculations. Beneficial ownership definitions extend beyond shareholdings to include effective control.
An individual may hold a minority economic interest or no direct shares at all through a holding company structure yet still qualify as a reportable beneficial owner if they exercise material control over the operating entity.
Key Indicators of Indirect Control:
- Holding majority voting rights within an upper-tier holding company that controls board appointments in the operating entity.
- Holding veto power over key operational decisions, financing, or asset sales in the operating company through shareholder agreements at holding-company level.
- Serving as a founder or primary trustee of an ultimate controlling family trust that acts as the parent holding entity.
- Possessing the practical authority to direct management decisions without holding an explicit majority of the equity.
Practical Action Plan for SME Boards
Maintaining an up-to-date and legally compliant beneficial ownership register across layered structures requires structured record-keeping. Directors should implement three key habits.
1. Prepare a visual group organogram
Alongside your formal securities register, map all parent entities, intermediate holdings, trusts, and individual shareholders to make ownership calculations easier and help reveal less obvious lines of control.
2. Establish an annual confirmation process with corporate shareholders
Require corporate shareholders to formally confirm changes to their internal ownership. Changes higher up the chain, such as a holding company issuing new shares, can dilute or increase an ultimate natural person’s indirect interest in the operating entity.
3. Update changes in beneficial ownership on the relevant registers
Ensure updates on relevant registers are made within the applicable statutory period. Non-compliance may result in administrative penalties and can create reputational or practical difficulties during banking, funding, or due diligence processes.
Transparency as Good Corporate Governance
The “look-through” principle is more than a compliance requirement. When applied properly, it provides lenders, investors, and regulators with a clearer picture of who ultimately owns and controls an enterprise.
Maintaining transparency across layered holding structures is an important legal requirement and part of sound corporate governance. Directors who proactively understand and document their ownership chains can reduce regulatory risk, avoid operational delays, and make banking or investor due diligence considerably smoother. The result is strengthened accountability and confidence in an organisation’s governance.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.