Controlling Interest

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. read more 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

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Source: Controlling Interest (wallstreetmojo.com)

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.

Solution:

In the present case the percentage of holding by Mr. X in the company XYZ is calculated as below:

Controlling Interest Example

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.read more 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;

Real-World Example

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.

Advantages

Disadvantages

  • 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

Conclusion

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.

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