Controlling Shareholder: Everything You Need to Know
A controlling shareholder, also known as a controlling interest, is a shareholder who owns the largest number of a company's outstanding shares.3 min read
2. Example of Controlling Interest
3. Benefits of Owning Controlling Interest in a Company
4. Disadvantages of Controlling Interest
5. What Are the Duties of Controlling Shareholders in the Minority?
A controlling shareholder, also known as a controlling interest, is a shareholder who owns the largest number of a company's outstanding shares. An entity may be a controlling shareholder in any of the following scenarios:
- An individual can be a controlling shareholder if he/she owns a significant number of a company's outstanding shares, even though the percentage is not a majority.
- An individual belongs to a group of shareholders that hold a majority of the stock of a company.
- An individual or person who belongs to a group (such as a consortium or family) that has control over the affairs of a company for reasons other than ownership of shares.
- A separate company that buys a majority of the stock in a company, effectively making the latter its subsidiary and gaining majority control over its affairs.
What is a Controlling Interest?
A shareholder or group of shareholders acting collectively have a controlling interest if they own the majority of shares in a company. Often, the individual or group that holds 50 percent plus one of the stocks in a company has the controlling interest. However, shareholders with less than 50 percent of the stocks can also have a controlling interest as long as they own enough stocks to vote at shareholders' meetings.
This is more evident in publicly owned companies where a large number of individuals and groups own enough stock to make meaningful contributions to the company's decisions and can even lobby for seats on the board of directors.
Example of Controlling Interest
An excellent example of controlling interest was how Michael Dell, with the help of a group of investors, bought a majority stake in Dell Technologies after he was forced out of his position as the CEO of the company. After getting back control of his company, Dell was able to make far-reaching decisions to solidify his position without any opposition from minority stakeholders.
Benefits of Owning Controlling Interest in a Company
Some of the benefits of a controlling interest include:
- The shareholder(s) with a controlling interest in a company has the power to choose the direction of the company's short and long-term goals by overturning any decision that does not tally with their positions.
- With the immense power that comes with a majority vote, a shareholder with controlling interest can become the chairman of the board of directors, a position which allows them to hire or fire the most senior people in the organization and make weighty decisions without any opposition.
- A controlling interest can choose who becomes a member of the board of directors.
- A controlling shareholder has the power to protect his/her majority stake in the company should the organization be faced with a merger or acquisition in the future.
- A controlling shareholder enjoys the largest share of rewards when the company is making a profit.
- It makes management more effective as the controlling interest is always on high alert to block any mismanagement that could adversely affect their investments.
Disadvantages of Controlling Interest
- Due to the size of their investment, the majority shareholders are the worst hit when the company is facing bad times.
- There is usually a conflict of interest as many controlling shareholders only look out for their pockets, forgetting minority shareholders. This is why there are checks and balances such as the entire-fairness standard of review to ensure that controlling shareholders don't abuse their privileges.
- Controlling shareholders leave little room for independent-minded directors to avoid losing their control of the organization.
- Controlling shareholders sometimes use their position to force minority shareholders out of the company.
What Are the Duties of Controlling Shareholders in the Minority?
- Transactions of shareholders with a controlling interest above or less than 50 percent of the outstanding stocks of a company must pass the entire-fairness review.
- Dual approval from independent directors and independent shareholders should be a precondition to the transactions of controlling shareholders where the fear of breaches is high, as in the case of mergers.
- Controlling shareholders are trustees of the company and its minority shareholders. They must protect the rights of shareholders.
Controlling shareholders play a significant role in the success or failure of public and private companies. While the position offers power and influence to make weighty decisions, it can also be a huge trap when the company is facing trying times.
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