If a shareholder or group acting together own a majority of 51% or more of the voting shares of a corporation, it usually means de jure control for most shareholder decisions, including the selection of the directors.
In a publicly traded corporation with widely dispersed shareholders, owning less than a majority may also provide a shareholder or group of shareholder acting together with de facto or so-called working control because no other shareholder has a competing significant ownership interest. In some situations, ownership of significantly less than a majority of shares may be the largest shareholding. The percentage needed to have this control will depend on a number of actors including how widely dispersed are the other shareholders. Thus, one who owns less than a majority can be a controlling shareholder based upon their exercise of actual control over the business.
The control group may either be a number of shareholders acting together (such as a family or investment group) or it may be another corporation owning contol creating a parent and subsiddiary situation.
- Because of their large investment, the control group is less diversifed than other shareholders and the fortunes of the business have a greater impact on them.
- A significant advantage is that the control group will closely monitor potential mismanagement to assure that he managers are running the business effecitvely. Thus, the corporation may be more efficiently run and monitoring costs may be reduced because of the lack of separation of ownership from control.
- A significant disadvantage occurs when there is a conflict of interest between the control gorup and other shareholders. Many of the monitoring devices available when there is separation of ownership from contol are not available. When there is a control group the possibility of either a proxy fight or a hostile takeover to take control is diminished. Truly independent directors are less likely to serve on the board. Instead of minority sharehodlers must rely on more disclosure adn fiduciary duty rules to protect them from self dealing.
- Those shareholders may be invovled in a self dealing transaction where they sue their control so that they dominate the actions by the board of director to favor their interests and treat the minority shareholders unfairly.
- They sometimes use their control to eliminate minroity sharehodlers in freezeout transaction and treat the minority unfairly.