Controlling Interest

A Controlling Interest is the shareholder’s power to speak in the corporate actions or decisions derived from possessing a considerable chunk of the company’s voting stock (more than 50%). However, such a stakeholder may not hold a significant portion of the company's common stocks.

Controlled interest accounting plays a pivotal role in finance by enabling one entity to have a significant influence or majority control over another. This is crucial in decision-making, governance, and financial consolidation. It affects the accounting treatment of investments and impacts an organization's ability to steer the direction and policies of another, making it a key factor in strategic investments and financial reporting.

Controlled interest is a significant concept in finance, particularly in the context of investments and corporate ownership. It refers to the level of influence or control that one entity has over another, often involving majority ownership or a significant equity stake in a subsidiary or affiliate company. This influence typically extends to decision-making, governance, and financial consolidation, making it a critical factor in various financial and accounting considerations.

One of the primary implications of controlled interest is its effect on the accounting treatment of investments. When an entity holds a controlled interest in another company, it may be required to consolidate the financial statements of the subsidiary into its own. This means that the financial results, assets, liabilities, and equity of the subsidiary become an integral part of the parent company's financial statements.

Controlled interest percentage also has a profound impact on an organization's ability to steer the direction and policies of another. It empowers the controlling entity to shape the strategic direction, management structure, and operational decisions of the subsidiary, which can be critical in achieving synergies, operational efficiencies, and strategic objectives.

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 shares 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.

Now that we understand the basics and intricacies of controlling interest accounting, let us apply that theoretical knowledge to practical application through the examples below.

Example #1

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 Company XYZ Ltd;

• Holding Percentage = 5,100 / 10,000 * 100
• Holding 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;

Example #2

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 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 of Michael Dell in the company Dell Technologies.

Below are a few points of importance with regard to controlling interest percentage.

•  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 company. So, they must work to protect the rights of the shareholders.
• It is more evident for publicly traded companies. 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.

Let us understand the advantages of controlling interest percentage through the points below.

• 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 members 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 dividends, retained earnings, share splits, 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 directors. It is common for the person with the controlling interest to become chairman of the company's board of directors.

Despite the various advantages mentioned above, there are a few factors that prove to be a disadvantage that irks companies and stakeholders alike. Let us understand them through the discussion below.

• 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.

Let us understand the differences between controlling and non-controlling interest through the comparison below.

Controlling Interest

• It involves a majority ownership stake, typically over 50% of the voting shares, granting significant control over the subsidiary.
• Allows the controlling entity to make key decisions, select management, and determine the strategic direction of the subsidiary.
• Requires the inclusion of the subsidiary's financials in the controlling entity's financial statements, providing a comprehensive view of the entire group's financial position.
• Enables the controlling entity to shape operational policies, governance structure, and overall business operations.
• It comes with a duty to act in the best interests of all stakeholders and maintain good governance practices.

Non-Controlling Interest

• Represents a minority ownership stake, typically less than 50% of the voting shares, providing limited control over the subsidiary.
• Limited ability to influence significant decisions or strategic direction; the controlling interest often makes decisions.
• Requires the use of equity accounting, where the investment is recorded at cost and adjusted for the investor's share of the subsidiary's earnings.
• The non-controlling interest's share of the subsidiary's earnings and equity is disclosed in the financial statements, but the subsidiary's financials are not consolidated.
• It lacks a significant impact on the subsidiary's operations and governance but still has a vested interest in its financial performance.

This article has been a guide to Controlling Interest & its meaning. Here we explain its examples, and advantages, and compare it with non-controlling interest. You can learn more about accounting from the following articles –

• What is Non-Controlling Interest?
• Proxy Vote
• Global Depository Receipts
• American Depository Receipts