What is Controlling Interest?
When a single shareholder or the group of shareholders who are acting collectively own majority of the voting shares of a company then they are said to have the controlling interest in the company. Majority of the shares means more than 50 % voting shares of the given company. If a person or the group person who have less than 50% of the ownership in the company can still have the controlling interest if a significant portion of the voting shares is there with that person or the group of persons. This is so because in many of the cases share do not carry the voting rights in meetings of the shareholder.
Example of Controlling Interest in a Company
Let’s take an example of controlling interest.
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 Company XYZ Ltd.
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- 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.
Real-World Example of Controlling Interest in a company
Michael Dell was forced to leave the position of the CEO in the company Dell technologies. However, Michael Dell later was 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. This is one classic example of the controlling interest by Michael Dell in the company Dell technologies.
Advantages of Controlling Interest
There are several different advantages of the controlling interest. Some of the advantages are as follows:
- 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 members 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 dividends, retained earnings, share splits 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.
Disadvantages of Controlling Interest
Limitations and drawbacks of the controlling interest include the following:
- 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 the controlling interest 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 from 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.
- 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 company. So, they must work to protect the rights of the shareholders.
- It is more evident for the publicly traded companies as a large number of the individuals or groups of individuals in case of publicly owned companies own enough stock for making meaningful contributions in the decision making of the company and 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 from the company.
This has been a guide to what is Controlling Interest and its definition. Here we discuss examples of controlling interest in a company along with advantages and disadvantages. You can learn more about accounting from following articles –