Definition
A controlled company refers to a firm in which a majority of voting shares are held by a single entity. This controlling entity, which could be an individual, family, or another corporation, has significant influence over the company’s operational and strategic decisions. Therefore, standard corporate governance practices may not apply in the typical manner, due to this concentrated control.
Key Takeaways
- A controlled company, in the realm of finance, is a firm in which a large portion, more than 50% of the voting rights, are held by a single entity. This implies a majority stake which gives them control over major decisions, shaping the company’s policies and strategies.
- Controlled companies often deviate from traditional corporate governance norms. While most publicly-traded companies are bound by regulations to constitute a majority of independent directors on their board, a controlled company is exempt from such stipulations. This means they can appoint their own preferred directors, thus having a significant say in company leadership.
- While this structure has benefits like faster decision-making due to fewer disagreements, it also brings about downsides including potential conflicts of interest and risk of minority shareholders’ rights being undermined. This increased risk can make investment in such companies more speculative.
Importance
The term “Controlled Company” is significant in finance as it refers to a company where a substantial amount of outstanding shares is owned by a single entity, making them the firm’s controlling shareholder.
This scenario can greatly impact corporate governance, decision-making processes, and shareholder rights since the controlling entity can use its majority voting power to influence the company’s strategies and operations, potentially surpassing other shareholders’ interests.
In certain regulations, such as those outlined in the NASDAQ and NYSE, controlled companies are exempted from specific corporate governance requirements, further increasing its relevance in financial contexts.
Understanding the dynamics of controlled companies can help stakeholders make informed decisions and evaluate potential risks.
Explanation
Controlled companies serve a unique purpose in the finance and business world as they mainly allow certain stakeholders, generally founders or early investors, to retain a majority voting power, and thus control, of the company even with minority ownership in terms of economic interests. This control is usually exercised through the creation of different classes of shares, with a certain class possessing disproportionately larger voting rights.
The aim is to maintain strategic direction and management of the company as envisioned by the controlling shareholder(s), which is particularly beneficial in industries that require long-term investment and mature gradually. Controlled companies play a significant role in the corporate landscape and are commonly used in taking a company public whilst preserving existing control.
It’s noteworthy for investors to consider that although a controlled company arrangement can lead to stability, due to its continuity in leadership, it may also limit shareholder’s influence over corporate policies and decisions because of the unequal voting power. The controlled company exemption under most exchange rules allows such companies to bypass certain corporate governance requirements, further highlighting the importance of investor’s due diligence when considering an investment into such entities.
Examples of Controlled Company
Facebook Inc.The well-known social networking company, Facebook Inc., is a prime example of a controlled company. Facebook’s founder, Mark Zuckerberg, maintains control over the company through his ownership of Facebook’s Class B shares, which have greater voting rights than Class A shares. As of 2021, Zuckerberg held 58% of the total voting power at Facebook.
Berkshire Hathaway Inc.Warren Buffet’s Berkshire Hathaway Inc. is a diversified holding company owning subsidiaries that engage in a variety of business activities. Buffet exercises significant control over Berkshire Hathaway via his massive equity stake in the company, which makes it a “controlled company” under financial terms.
News Corp.News Corp, a multinational mass media company, is another example of a controlled company. Rupert Murdoch, the company’s founder, has maintained control over the company by owning a significant portion of its Class B voting shares. This allows him to control election of the board of directors, thereby ensuring that he remains in control of the company even if he does not own a majority of the total shares outstanding.
FAQs about Controlled Company
What is a Controlled Company?
A Controlled Company is a publicly traded company that has more than 50% of voting rights controlled by an individual, a group of individuals or another company. This controlling entity has the ability to influence the decisions and direction of the company.
What are the advantages of a Controlled Company?
The main advantage of a Controlled Company is the ability to make quick decisions because the controlling entity does not need to negotiate with other shareholders on every decision. It also provides the controlling entity an opportunity to implement long-term strategies which may not be favored by non-controlling shareholders looking for short-term gains.
What could be the risks of a Controlled Company?
One risk involves the potential for the controlling party to make decisions that favor themselves at the expense of minority shareholders. There is generally less accountability and it could potentially lead to a lack of checks and balances which could risk the company’s overall health and value.
How can I tell if a company is a Controlled Company?
To identify whether a company is a Controlled Company, you can check their proxy statements, annual reports or other securities filings where they are required to disclose the proportion of voting rights held by different parties.
Related Entrepreneurship Terms
- Majority Shareholder
- Minority Interest
- Family Controlled Companies
- Voting Rights
- Corporate Governance
Sources for More Information
- Investopedia: A comprehensive resource for investing and finance topics, providing detailed and easy to understand definitions.
- Nasdaq: Offers real-time quotes, market news, and stock information alongside in-depth finance and investment content.
- The Financial Times: An international daily newspaper with a focus on business and economic current affairs.
- U.S. Securities and Exchange Commission: The official website of the U.S. Securities and Exchange Commission with a vast library of information about securities law and finance.
