Controlled company

Controlled company - it is a term, which refers to the shareholding structure of the company. Generally it means, that there is a group of shareholders, which bring together the majority of the company's shares and therefore this group has a decisive voice in managing the company. In other words, the majority of votes belonging to the controller in practice means that decisions made at shareholders meeting are actually his own decisions and this is why the company is said to be controlled.

Characteristics

As it has been already said, the controlled company is a company, which affairs are controlled by the group of shareholders, due to their majority shares. However it should be mentioned, that sometimes the controller does not have to collect a majority of the shares but it may be enough to own significant fraction. Some researches claim that dominant shareholder should concentrate nothing less than 30% of company's shares, otherwise it is not appropriate to use the term "controlled company" (Kastiel K. 2016, p. 106).

The concept of controlled company is much more common in Continental Europe than in the US and the United Kingdom. According to the researches the controller's function usually consists of the following entities (Hofstetter K. 2006, p. 600):

• families,
• founders,
• parent companies,
• shareholder groups.

What is interesting, many studies show that family controlled companies have better performance than these with non-family ownership and their cost of debt tend to be lower. However, it should be mentioned that in order to improve the company's operations, it is necessary to combine a moderate presence of the family board and a strong representation of independent directors. Furthermore, such companies are growing slower and becoming less efficient over time, but they can exist longer than other competitors on the market (Hofstetter K. 2006, p. 609-610).

Independent directors issue

The role of independent directors in the controlled company is indispensable. In general, their function consists of vigilant monitoring the management and promotores activity in the interest of public shareholders. Their task is also to support the board with strategic advice in maximizing the company's overall net worth. However, they should receive clear guidelines regarding their obligations and their responsibilities should be constrained (for example criminal liability). The independence of directors can be defined, inter alia, as not having financial dependencies with the controlling shareholder so that to prevent conflicts of interest (Khanna V., Mattew J. S. 2010, pp. 37-49).

Minority shareholders issue

On the other hand, it should be noted that in this shareholder structure it is extremely important to develop methods to protect the interests of shareholders, who do not have enough voting power. The main concern of minority shareholders is associated with the risk of not receiving proportionate shares, as well as the practice of transferring the company's resources for private purposes by the controlling shareholders. Moreover, it is obvious that if the interests of the minority are adequately protected, then the whole company has better prformance. It should be also mentioned that the opposite type to this share structure is called a widely held company (Rachagan S. 2006, pp. 264, 267).

Examples of Controlled company

• News Corp: News Corp is a global media and entertainment company that is headquartered in New York City. It is controlled by the Murdoch family, which holds 39% of the company’s voting shares. Rupert Murdoch, the chairman and chief executive officer of News Corp, is the family’s most influential member. The Murdoch family has a long history of using their voting power to make strategic decisions that have been beneficial for the company.
• Berkshire Hathaway: Warren Buffett is the majority shareholder of Berkshire Hathaway, owning approximately 39.4 percent of the company’s voting stock. This gives him control over the decisions that are made by the company’s board of directors. Buffett is the company’s chairman, CEO, and largest shareholder, and he has used his control of the company to make decisions that have been beneficial to the company’s long-term growth.
• Siemens AG: Siemens AG is a German technology company that is controlled by the Siemens Foundation, which owns slightly more than 50 percent of the company’s voting stock. The foundation is made up of members of the Siemens family, who are the majority shareholders of the company. The family has used their control of the company to make decisions that have been beneficial for the company’s long-term growth.

Advantages of Controlled company

Controlled companies offer a variety of benefits to the controlling shareholder. These advantages include:

• Increased control over the company: The controlling shareholder has the power to make the majority of the decisions and to appoint the board of directors and other key positions. This ensures that the company is run in the best interest of the controlling shareholder.
• Enhanced financial stability: By having the majority of the voting power, the controlling shareholder can ensure that the company is financially stable and that it is making money.
• Reduced costs: With a controlling shareholder, the company can reduce costs associated with shareholder meetings and other decision-making processes. This can help to save the company money.
• Access to additional resources: The controlling shareholder often has access to additional resources, such as capital, which can be used to help the company grow.
• Increased shareholder value: By having control over the company, the controlling shareholder can increase the value of the company, and the value of their shares, over time.

Limitations of Controlled company

A controlled company is subject to certain limitations that can prevent it from achieving its desired potential. The following are some of the most notable limitations of a controlled company:

• Limited access to capital: A controlled company may have difficulty obtaining capital from third-party sources, as such investors may be wary of investing in a company with a controlling shareholder.
• Limited access to new markets: A controlled company may lack the resources to enter new markets, as the controlling shareholder may not be willing to make the necessary investments.
• Limited innovation: A controlled company may be unable to innovate and develop new products or services due to a lack of resources and direction from the controlling shareholder.
• Limited decision-making power: A controlled company may be limited in its ability to make decisions due to the influence of the controlling shareholder, who may be unwilling to take risks or invest in new products or services.
• Limited independence: A controlled company may lack independence, as the controlling shareholder may have significant influence over the company’s operations and decisions.

Other approaches related to Controlled company

Introduction: Besides the basic concept of controlling a company, there are other approaches related to it, such as:

• Corporate governance - this approach implies that the controller is responsible for setting up the company's corporate governance system, which will ensure the proper functioning of the company. The controller should also ensure that all the company's stakeholders are treated fairly and that the shareholders' interests are protected.
• Leverage - the controller may use his majority shareholding to influence the company's decisions and take advantage of any opportunities that may arise. This can be done by making strategic investments, increasing borrowing or issuing new shares.
• Mergers and acquisitions - the controller can use his majority shareholding to facilitate the merger and acquisition of other companies, which can potentially increase the company's profits and market share.
• Business strategy - the controller can also use his majority shareholding to influence the company's overall strategy and direction. This can include setting up new business units, launching new products or services, or expanding into other markets.

Summary: In conclusion, controlling a company involves more than just a single concept. There are other approaches related to it, such as corporate governance, leverage, mergers and acquisitions and business strategy, which can be used to help the company achieve its goals.

Controlled company — recommended articles

Stock insurance company — Management company — Quasi partner — Types of joint venture — Social enterprise — Shareholder theory — Corporate agent — Capital restructuring — Selling Group

References

• Hofstetter K. (2006), One Size Does Not Fit All: Corporate Governance for Controlled Companies, "North Carolina Journal of International Law and Commercial Regulation", Vol. 33, Issue 3, pp. 598-663
• Kastiel K. (2016), Against all odds: hedge fund activism in controlled companies, "Columbia Business Law Review", Vol. 16, pp. 102-173
• Kastiel K. (2015), Executive Compensation in Controlled Companies, "Indiana Law Journal", Vol. 90, Issue 3, pp. 1132-1175
• Khanna V., Mattew J. S. (2010), The role if independent directors in controlled firms in India: preliminary interview evidencer, "National Law School of India Review", Vol. 22, pp. 35-66
• Rachagan S. (2006), Agency costs in controlled companies, "Singapore Journal of Legal Studies", pp. 264-284

Author: Agnieszka Wierzba