The controlling shareholder is the one who has the greatest and most precise influence on the decision-making of the organization in which he invests. He achieves this position when he is able, through the majority of the votes in the meetings, to infer on issues such as the appointment of the company’s new managers.
The controlling shareholder can be an individual or a legal entity, acting individually or in groups.
Its activities are extremely important for the company’s sustainability. This is because, depending on the position taken, they can leverage or hinder organizational success.
With that in mind, there are already some legal procedures that aim to mitigate possible abuses of power by the controlling shareholders. Respect for these procedures ensures a more efficient control action that does not harm either the company or the other shareholders.
What are the main characteristics of a controlling shareholder?
A common mistake in the administrative-financial universe is to assume that every controlling shareholder is a majority shareholder.
Although it is common, it is not mandatory to hold more than 50% of a company’s voting capital in order to exercise control power.
In fact, this is only one of the three types of controlling shareholder in existence.
In the other two, the minority shareholder can control the organization in the following ways:
- In the first one, he joins other shareholders, by means of a voting agreement, in order to achieve an absolute majority in the sum.
- In the second, even with voting capital below 50%, the shareholder is able to dominate the majority vote and the choice of directors. It is a union of persuasion and opportunity. In this specific case, there is what is known as pulverized control: among the companies that operate in the Brazilian market, Embraer, Hering and Valid are some of those that adopt this model.
How is control of an organization defined?
As stated earlier, there is more than one way to become the controlling shareholder.
However, it is important to understand that, in this case, no rule is written in stone. Everything can change at any time.
Just as organizations with defined control (where control is concentrated in a single majority shareholder or in a group of shareholders) can open up to dispersed control, the opposite can also happen.
What will define these transitions is the behavior of the controlling shareholders (current or future).
For example, in 2005, JC Lenny (then controlling shareholder) distributed its shares of Renner in the market, passing control of the company from defined to pulverized.
It was not a general decision by Renner itself, but by a single important shareholder, who modified the control model adopted by the company.
The opposite movement is more complex. This is because it is not uncommon for companies with already dispersed control to resort to strategies such as the poison pill to prevent the regrouping of command.
As a curiosity, the poison pill is a very common business defense tactic in the take over world . As it obliges any shareholder to launch a Public Tender Offer (OPA) throughout the organization, if it reaches 30% of the shares, it also helps companies that wish to maintain their dispersed control.
In the “all or (almost) nothing” style, it prevents increasing concentrations that make it possible for the majority shareholders to ascend in the future.
What are the ways to prevent abuse of power by controlling shareholders?
Also under the Brazilian Corporate Law, the controlling shareholders have a great commitment to the organization. Basically, they are obliged to watch over the fulfillment of the company’s social function, so that all actions performed on it and are aligned with its object.
It is also a general duty to other shareholders, employees and the community in general.
To ensure that this is accomplished, the law establishes that the controlling shareholder can, yes, be held individually responsible for the actions taken with abuse of power. That is, if their actions are not in line with the principles mentioned above, it is possible that they will be punished for that.