As a legal definition, the controlling shareholder is either:
- The person who owns the majority of shares or has the domination or control over the corporation;
- The member of a small group of shareholders who own the majority of the shares collectively or otherwise have the domination or control over the corporation.
In this capacity, the controlling shareholders may also control the composition of the board of directors and thus influence the company’s decisions. In some cases, a shareholder may be controlling even if they own a smaller percentage, but with a significant value of the shares.
Controlling shareholders have fiduciary duties towards the minority. In this manner, a small group of concerted shareholders who together represent the majority of the shares become controlling shareholders, thus developing fiduciary responsibility towards the others who are not part of the group.
These fiduciary duties may intervene in various situations such as:
- The controlling shareholders may use their control in order to influence the decisions of the board of directors to the disadvantage of the minority shareholders;
- They may use their control to exclude minority shareholders from freeze-out transactions;
- In cases of sale of control or even of the company, the controlling shareholders may sell their shares, disregarding the desires of the minority.
Advantages and disadvantages for shareholders in a company with a control group.
- Since there is large investment from the part of the controlling shareholder, their portfolio is less diversified and the success of the company affects them to a greater extend. For these reasons, they may be more involved in the management decisions, especially the ones with long-term impact, with a risk management strategy set in place.
- The controlling shareholder/group will monitor the activity of the company more closely for any mismanagement to ensure efficiency and performance, since any problems would affect them significantly more than the other shareholders. In the same time, the management costs may be reduced since there is no differentiation between ownership and control.
- An important inconvenience appears when there is a conflict of interests between the controlling group and the other shareholders, since a lot of the monitoring strategies set in place when there is a separation between ownership and control do not exist in this case. Minority shareholders would depend on this case on the disclosure and fiduciary duties that the controlling group are tied by. The latter also is protected from a hostile takeover, but needs to come up with viable exit strategy that would benefit all shareholders in case of conflict.