Controlling Interest


Definition of Controlling Interest

When an investor, a company, or a group of investors collaborating have the majority of shares, i.e., more than 50% of shares in a company, this shareholding is known as controlling interest in that company.

Explanation

When an investor or a group of investors owns the majority of shares, i.e., more than 50% of a company’s shares, these investors have a controlling interest in the company. This is because it gives them the majority of voting shares and voting rights. In some cases, all the shares do not constitute voting rights in the shareholder’s meeting. So in these cases, shareholders with less than 50% shares also can have controlling interests in the company.

Example of Controlling Interest

Suppose a company, ABC has 1 million outstanding shares. An investor has 600,000 shares in the company. So we want to know whether that investor has controlling interests in the company or not.

Total outstanding shares 1,000,000
Investor’s shares 600,000
Investor Percentage of Shares 60%

Since the investor has more than 60% shares in the company, which is more than 50%, he has a controlling interest in the firm ABC.

In many family-controlled businesses, shareholding is like the family owns more than 50% of the company’s total shareholding and thus controls the decision-making process though the company is public. For example, HCL Technologies is an Indian MNC IT company. This is a public company, but its founder Shiv Nadar and their family own around 60 percent shares of the company. Thus Shiv Nadar and their family have a controlling interest in the company.

How Much is Controlling Interest?

It is said to be achieved when a shareholder or group collectively has the majority of voting shares. That means in normal conditions, these shareholders should have more than 50% of the total shares to have Controlling Interests in a company.

Importance of Controlling Interest

It is essential when the shareholder wants to make all the decisions about the company. This kind of thinking can be seen among the founders or their families after the company has been made public. Though their company has been public, they still want to make all the decisions about the company because of emotional attachment. So they own more than 50% of the shares to have voting rights, and the rest of the shares are divided among the other shareholders.

Controlling Interest vs Non-Controlling Interest

Controlling interest is when the shareholders or group of shareholders own more than 50 percent of the stocks in an organization. On the other hand, the non-controlling interest, also known as minority interest, is the share in a company where the investor, a group of investors of the entity, has less than 50 percent of the company’s shares.

Advantages

Some of the advantages are mentioned below:

  • With controlling interest, shareholders or the group owns the majority of voting rights and can overturn any board member’s decision.
  • If the company is doing and earning good profits, then the shareholders can have a majority of that profit in their pocket.
  • Management of the company works more efficiently if there is a shareholder with controlling interests as the controlling shareholder keeps track of management work more effectively.
  • Controlling shareholders can quickly get a seat on the board of directors. Also, there are good chances they may become board chairman.

Disadvantages

Some of the disadvantages are mentioned below:

  • In bad times, controlling shareholders get most affected because they have the majority of shares in the company.
  • Minority shareholders get affected if one shareholder or group of shareholders controls the company because the majority shareholder can easily overturn the minority shareholder’s decision.
  • There can be chances of a rift between management and majority shareholders.
  • Conflict may also arise between majority and minority shareholders.

Conclusion

When an investor or group of investors owns a majority of shares in a company, they are known to have a controlling interest in the company. They can make all the decisions for the company. Sometimes these shareholders may create a block for minority shareholders, creating a rift between them and even between majority shareholders and the company’s management.

Recommended Articles

This is a guide to Controlling Interest. Here we also discuss the definition, how much controlling interest is, and its advantages and disadvantages. You may also have a look at the following articles to learn more –

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  2. Times Interest Earned Ratio
  3. Imputed Interest
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