What is Controlling Interest?
Controlling interest is when a shareholder, or a group acting in kind, holds a majority of a company's voting stock.
- Controlling interest allows the shareholder, or shareholders, to veto or overturn decisions made by existing board members.
- Controlling interest gives ownership of operational and strategic decision-making processes.
- Controlling interest grants an investor, or investors, leverage to increase their shareholding stake in a company in a merger or acquisition.
Understanding Controlling Interest
Controlling interest is, by definition, at least 50% of the outstanding shares of a given company plus one. However, a person or group can achieve controlling interest with less than 50% ownership in a company if that person or group owns a significant portion of its voting shares, as in many cases, not every share carries a vote in shareholder meetings.
Controlling interest gives a shareholder or group of shareholders significant influence over the actions of a company. A party can achieve controlling interest as long as the ownership stake in a company is proportionately substantial relative to total voting stock. With the majority of large public companies, for example, a shareholder with much less than 50% of the outstanding shares may still have a lot of influence at the company. Single shareholders with as little as 5% to 10% ownership can push for seats on the board or enact changes at shareholder meetings by publicly lobbying for them, giving them control.
Benefits of Controlling Interest
The upside of holding a controlling interest in a company can come in many forms. First, whether the company is public or private, controlling interest gives a person or group of people substantial influence. Since, by definition, the party with controlling interest automatically has the majority vote, it allows an individual to veto or overturn decisions made by existing board members. This gives people who have a controlling interest in a company the ability to take ownership over the operational and strategic decision-making processes.
Further, in some companies, if an individual has the controlling interest of the company, the firm will automatically make that person the chairman of the company's board of directors. This gives the individual with controlling interest even more power than the majority vote. In addition to retaining veto power over a board vote, the individual can effectively make board decisions on their own, including hiring C-level executives.
Finally, controlling interest grants an investor the leverage to increase their shareholding stake in a company in the event of a merger or acquisition. For example, in a strategic merger that involves a share swap, the investor who holds controlling interest would structure a deal that continues to give them majority voting power over the new entity.
Real World Example of Controlling Interest
Facebook, Inc. (FB) founder and CEO Mark Zuckerberg has controlling interest of the social media giant owning just 18% of the company’s Class B shares. That’s because he owns the majority of voting rights – Facebook’s Class B shares have 10 votes per share, while the company's Class A shares carry only one vote per share. Zuckerberg, along with a small group of insiders, controls almost 70% of Facebook's voting shares. Zuckerberg controls nearly 60% of the stock in his own right.
Alphabet Inc. (GOOGL), the parent company of Google, has structured its shares in a similar way to Facebook. Larry Page, Sergey Brin and Eric Schmidt have controlling interest, owning over 60% of the company’s B voting shares that carry 10 votes per share. In contrast, the tech titan’s Class A shares have only one vote per share, while the company's Class C (GOOG) shares have no voting rights.