What is Controlling Interest?

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, the share does not carry the voting rights in shareholder meetings.

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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 a 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:

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 * 100Holding Percentage = 51%

Since Mr. X is holding at least 50 % of voting shares of the given company XYZ Ltd. plus one, Mr. X is having controlling interest in the company;

Real-World Example

Michael Dell was forced to leave the CEO position in the company Dell technologies. However, Michael Dell was later able to buy the majority stake in the company Dell Technologies with a group of investors’ help. After gaining control of the company, Dell made decisions to solidify his position in the company. It is one classic example of the controlling interest by Michael Dell in the company Dell technologies.

Advantages

  • A shareholder or the groups of shareholders who have the majority control in the company have the sweeping power to veto or overturn the decisions 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.read more made as they command the majority of the company’s votes. It also gives ownership of operational and strategic decision-making processes.When the company generates profits, the controlling shareholders enjoy the largest rewards share. Such rewards include dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more, 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.read more, share splitsShare SplitsStock splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. read more, or any of the proceeds received by selling the company to the other entity.When there are controlling shareholders in the company, the company’s management works more efficiently and effectively as controlling shareholders always keep a 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, it gives guaranteed membership in the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals.
  • read more. It is common for the person with the controlling interest to become chairman of the company’s board of directors.

Disadvantages

  • In case the company faces a bad time, the shareholder or group of shareholders with the majority control gets most affected because their size of investment in the company is huge compared to others.Sometimes it becomes dangerous for the minority shareholders as shareholders or groups of shareholders. They have the majority control and 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 little room for them.A significant disadvantage occurs in case there is a conflict of interest arises between a controlling group and other shareholders.

Important Points of Controlling Interest

  • A shareholder or the groups of shareholders with the majority control or controlling interest in the company have the power to veto or overturn the existing board members’ decisions. 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.read more. So, they must work to protect the rights of the shareholders.It is more evident for 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.read more. In the case of publicly owned companies, many groups of individuals own enough stock to make meaningful contributions to the company’s decision-making. They even can lobby for the seats on the board of directors.

Conclusion

When a person or a group of persons holds at least 50 % of the company’s voting shares plus one, then they have a controlling interest in the company. The latter is having the majority control use their position sometimes to force the minority shareholders out of the company. Sometimes they become dangerous for the minority shareholders as the controlling shareholders.

This article has been a guide to what is Controlling Interest and its definition. Here we discuss how it works, examples of controlling interest in a company, and its advantages and disadvantages. You can learn more about accounting from the following articles –

  • What is Non-Controlling Interest?Proxy VoteGlobal Depository ReceiptsAmerican Depository Receipts