Legal Entity Ownership Program (LEOP) – Definition of Change in Control

Change in Control

A person or entity has control of an entity if they own more than 50 percent of the ownership interest (e.g., voting stock for corporations, capital and profits for partnerships and limited liability companies) in an entity.   A change in control occurs when a person or entity obtains more than 50 percent of the ownership interest in the entity. A transfer of ownership interest in a legal entity that results in a change in control of that entity is a change in ownership of the California real property owned or held under lease (under certain circumstances) by the entity as of the date of the change in control.  (See Revenue and Taxation Code section 64(c).) Control may be obtained directly or indirectly.

Direct Control:  A person or entity obtains direct control of an entity when the person or entity either (1) acquires more than 50 percent of the voting stock of a corporation; or (2) acquires a majority (more than 50%) ownership interest in any partnership or LLC capital and profits; or (3) acquires more than 50 percent of the total ownership interest in any other entity.

Corporation ExampleDirect Control: A owns 55 percent of the voting stock of Corporation B. C acquires A's 55 percent interest in B. Result: C obtained direct control of Corporation B.

Partnership ExampleDirect Control: Two brothers, M and B, created a partnership. B owns 51 percent and M owns 49 percent of the partnership. The partnership had a continuation clause so that the partnership would not terminate if either B or M died. Upon B's death, his will gave a 2 percent interest to M and a 49 percent interest to his son D. Result: M obtained control of the partnership on the date of B's death.

Indirect Control: A person or entity may obtain indirect control of an entity by acquiring direct control of another entity that, in turn, directly or indirectly controls another entity.

Corporation ExampleIndirect Control: A owns 55% of the voting stock of Corporation B. Corporation B, in turn, owns 100% of the voting stock of Corporation Z. C acquires A's 55% interest in Corporation B. Result: C obtained direct control of B and indirect control of Z.

(Refer to chapter 6, page 42 of Assessors’ Handbook Section 401, Change in Ownership for a discussion of change in control.
Refer to Revenue and Taxation Code section 64(c)(1) which specifies that a change in control is a change in ownership of the real property; and Property Tax Rule 462.180(d)(1).)

Merger of Legal Entities

The merging of two corporations or other entities results in a change in control if a person or entity gains control of the surviving entity at the same time as the merger. In that case, the real property owned by the surviving entity, including the real property previously owned by the disappearing (merged out) entity and transferred by operation of law to the surviving entity, is subject to reassessment unless an exclusion applies. (See Exclusions from Reassessment section for explanation.)

Typically, the merging of two entities results in a change in ownership of the real property owned by the disappearing entity, unless an exclusion applies. There is no change in ownership when a statutory merger occurs when the law of jurisdiction of the surviving entity provides that such entity succeeds to the assets of the disappearing entity without other act or transfer, and the owners of the disappearing entity maintain the same ownership interest of the surviving entity that they held in the disappearing entity.  (See Assessors’ Handbook Section 401, page 46 for additional information and Property Tax Rule 462.180(d)(4).

A change in control can also occur if the disappearing entity held controlling interests in another entity that owned California real property. California Corporations Code section 1107 specifies that the separate existence of the disappearing corporation ceases and the surviving corporation succeeds, without other transfer, to all the rights and property of the disappearing corporation. Since a statutory merger results in a transfer of all assets of the disappearing entity, any ownership interests in legal entities that the disappearing entity owns directly would also transfer to the surviving entity as a result of the merger, which would result in a change in control of such subsidiaries under R&TC section 64(c)(1).

If a merger occurs and the disappearing entity owns real property, it is important to perfect title for the property by recording a copy of the certificate of merger and merger agreement with the county recorder where real property of the disappearing entity is located. In practice a deed is often recorded with the merger documents with the name of the disappearing entity listed as the grantor and the name of the surviving entity listed as the grantee explaining that the transfer of property resulted from a merger. Recording merger documents on properties owned by the disappearing entity ensures the name on title properly reflects the owner of record. California Corporations Code 1109 provides that the filing of the certificate of merger and agreement in the office of the county recorder shall evidence record ownership in the surviving entity of all interest of the disappearing entity and to the real property located in that county.

Acquisition by Majority Partner

If an owner of a majority interest (meaning more than 50%) in a partnership acquires all of the remaining partnership ownership interests or otherwise becomes the sole partner (for example, upon the withdrawal of all the other partners from the partnership), the transfer of the minority interests to the majority partner is not a change in ownership of the partnership's real property. (See Revenue and Taxation Code section 64(c)(2).)