What Does Controlling Interest Mean?
When a private company goes public, it raises capital by selling a stake in the company through an instrument called shares. Both retail and institutional investors may be interested in buying these shares. This is called the first issue. The entity that buys these shares becomes a part owner in the business. Depending on the number of shares purchased, the investor gets the right to influence certain decisions that will affect the company. Such investors are said to have a controlling stake in the company.
Some of the benefits of having a controlling interest with the stockholder are voting rights, limited liability, chances of getting substantial profits when the company flourishes, and a few others. The one with the highest number of shares in hand has more controlling interest in the company. The lesser the stocks or shares with the shareholder, the lesser will be the controlling interest in the company, and vice-versa.
The controlling interest depends on the voting shares of the company. The person or the stockholder having more voting shares have more power or authority in the company and a shareholder or a group of shareholders has the major controlling interest.
The shareholder or the group or the entity with controlling interest has the power to communicate and have a major say in the company’s decision-making. The shareholder with voting rights beyond 50% is referred to as the one with a major controlling interest in the company. At times, shares don’t possess voting rights even though the shareholder has so many shares with them.
Controlling Interest Definition
Controlling interest is where an entity has the rights and powers in the company’s decision matters. The shareholder holding beyond 50% of the voting shares of a particular company has more controlling interest than anyone in the company. The shareholder or a group of them will have the deciding authority and control over the company and their meetings. Shareholders with authorized or outstanding shares have the upper hand in the company but they are not entitled to decision-making.
Even though they have more shares of the aforementioned types, they are not allowed to be a part of the company's decision-making and management. The shareholders with more voting shares can influence the company and their informed decisions accordingly. Also, these are the shareholders with a more controlling interest in the company’s say.
As long as the shareholder or a group or an entity holds a considerable stake in the company, i.e, the controlling interest in comparison with the voting rights. Shareholders with limited ownership in the company can also partake in the company matters, and present changes in the policies, if any.
Advantages of Controlling Interest
Here are the advantages of controlling interest with a simple example for more clarity:
- The shareholder or the entity or the group of shareholders possessing the controlling interest have more power over others in the company.
- The shareholder with the highest number of voting shares has the authority or influence to decide or overturn matters in the company. That respective shareholder has controlling interest beyond that of the authorized/issued shareholders of the company. Additionally, these shareholders will get ownership and a say in the operations and management of the company.
- In case, if the company flourishes well in the market, the shareholders or the group with the controlling interest enjoy the credits gained by the company. The gains can be in the form of profits, stock splits, retained earnings, dividends, or any other income gained by the company on selling their business to another organization.
- If the shareholder has more than 50% of the voting shares in the company, they’ll be given the head as the chair of the company. Even their vote has more power than the other board directors and other shareholders of the company. Plus, the shareholder with the controlling interest has the power to hire other level executives. They can also retain or reject the board votes if they feel not so worthy or profitable for the company.
- If the company is enduring a merger or an acquisition, the controlling interest investor has the highest stake in the takeover of the company. Whether it’s a share swap or a merger or an acquisition of the company, the investor with controlling interest has the right to design the deal that grants them more voting rights on the acquired company.
- The shareholder with the controlling interest gets guaranteed membership and the highest spot on the company’s board.
- Having controlling interest shareholders puts the company’s problems and mismanagement issues at bay. Furthermore, they’ll keep an eye on every aspect of the company and take swift actions that’ll alleviate the problem in no time. With the controlling interest shareholders, the company could curtail the hassles to an extent.
Example of Controlling Interest
For instance, Raju has 10,200 shares of ABC Limited company. The overall outstanding shares available in the market are $20,000.
Looking at Raju’s shares, the percentage of shares he’s holding with him is as follows:
The calculation is pretty straightforward. Divide Raju’s shares with outstanding shares of ABC Ltd.
The percentage of shares held by Raju = 10,200/20,000 * 100 = 51%
From the above figure, one can decipher that Raju holds more than 50% of the voting shares of ABC
Ltd. This states that Raju has the highest controlling interest in the company.
If the shareholder or a group of shareholders or an entity has a minimum of 51% of the shares of a certain organization, then they have the majority of the controlling interest in that company. This can be controversial and conflicting at times because the one with the highest voting shares may use their authority to control the decisions in the company. Any minority shareholders may or may not be considered as significant as the ones with deciding controlling interest. Besides, these shareholders can veto or rule out the minority shareholders as well.