What is Controlling Interest?
A Controlling Interest is the shareholder’s power to speak in the corporate actions or decisions derived from possessing a considerable chunk of the company’s voting stock (more than 50%). However, such a stakeholder may or may not hold a significant portion of the company’s common stocks.
Suppose a person or the group person who has less than 50% of the ownership in the company can still have the controlling interest if a significant portion of voting sharesVoting SharesVoting Shares are the shares that authorize the shareholder to vote on Company issues like modifying its corporate policies or selecting Board of Directors etc. is there with that person or the group of persons. It is so because, in many cases, share does not carry the voting rights in meetings of the shareholder.
Controlling Interest Example
Mr. X is holding the 5,100 shares in the company XYZ Ltd. The total outstanding shares of the company XYZ Ltd. in the market is $10,000. Whether Mr. X has controlling interest in the company XYZ or not? All shares have equal votes.
In the present case the percentage of holding by Mr. X in the company XYZ is calculated as below:
Holding Percentage = Shares of Mr. X / Total outstanding shares of CompanyOutstanding Shares Of CompanyOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet. XYZ Ltd;
- Holding Percentage = 5,100 / 10,000 * 100
- Holding Percentage = 51%
Since Mr. X is holding at least 50 % of voting shares of the given company XYZ Ltd. plus one, so Mr. X is having controlling interest in the company;
Michael Dell was forced to leave the position of the CEO in the company Dell technologies. However, Michael Dell was later able to buy the majority stake in the company dell technologies with the group of investor’s help. After gaining control of the company back, dell made decisions for solidifying his position in the company. It is one classic example of the controlling interest by Michael Dell in the company Dell technologies.
- A shareholder or the groups of shareholders who have the majority control in the company have the sweeping power to veto or to overturn the decisions which the existing board membersBoard MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company's policies, dividend payouts, top-level managers' recruitment or layoff and executive compensation. made as they command the majority of the votes of the company. It also gives ownership of operational and strategic decision-making processes.
- When the company is generating the profits, then the controlling shareholders enjoy the largest rewards share. Such rewards include dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company., retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company., share splitsShare SplitsStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly., or any of the proceeds which are received by selling the company to the other entity.
- When there are the controlling shareholders in the company, the management of the company works with more efficiency and effectiveness as controlling shareholders always keeps check on the management and block any mismanagement, which could affect their investments negatively in the company.
- When there is a majority interest in any company, then it gives guaranteed membership in the board of directors of the company. It is quite common for the person having the controlling interest to become chairman of the board of directors of the company.
- In case the company faces a bad time, the shareholder or group of shareholders who are having the majority control gets most affected because their size of investment in the company is huge as compared to others.
- Sometimes it becomes dangerous for the minority shareholders as the shareholder or group of shareholders who are having the majority control use their position sometimes to force the minority shareholders out of the company.
- Shareholders who have a controlling interest in the company have fear from independently minded directors of losing their control in the organization, so they leave a little room for them.
- A significant disadvantage occurs in case there if a conflict of interest arises between a controlling group and other shareholders.
Important Points of Controlling Interest
- A shareholder or the groups of shareholders who have the majority control or controlling interest in the company have the power to veto or to overturn the decisions which the existing board members made. It also gives ownership of operational and strategic decision-making processes.
- Controlling shareholders are the trustees of the company and the minority shareholders of the companyMinority Shareholders Of The CompanyMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.. So, they must work to protect the rights of the shareholders.
- It is more evident for the publicly traded companiesPublicly Traded CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market.. Here a large number of or groups of individuals in case of publicly owned companies own enough stock for making meaningful contributions in the decision making of the company. They even can lobby for the seats on board of directors.
When a person or a group of persons holds at least 50 % of voting shares of the company plus one, then they are having a controlling interest in the company. Sometimes they become dangerous for the minority shareholders as the controlling shareholders who are having the majority control use their position sometimes to force the minority shareholders out of the company.
This article has been a guide to what is Controlling Interest and its definition. Here we discuss how it works along with examples of controlling interest in a company along with advantages and disadvantages. You can learn more about accounting from following articles –