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.

There are advantages and disadvantages for shareholder in a corporation with a control group.

  • 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.

Generally, a shareholder has no fiduciary duty when voting her shares because pursuing one's economic self interest is the usually reason why one invests in shares. But controlling shareholders are not merely shareholders becauese they may use their control and position in the corporation unfairly for their own self interest.

The fidcuary duty of controlling sharehodlers may come up in a variety of contexts.

  • 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.
  • sale of control - There are also times when the control group sell their shares to another, receiving a substantial premium over the market share and the action harms the corporation or the minority sharheolders.
  • Sale of a corporation

If the duty of loyalty applies to any of thse tranasction as a conflict of interest then a fairnesss inqury may be applied with the burdern of proof usually on the controlliing shareholder to prove entire fairness, i.e., both faith deaing and fair price. The contorlling shareholders may try to change the level of judicial scrutiny by using independent directors to approve the transaction or by having the transction ratified by the disinterested shareholders.

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