A non-controlling interest is a shareholding of less than 50% in a company. It is also referred to as a minority interest.
What does non-controlling interest mean?
A shareholder who has a minority interest in a company cannot usually play a direct role in its management. On the other hand, if a company has a majority stake in another firm, and owns say, 80% of the firm’s share capital, it is said to have a controlling interest. The company that holds 80% of the shares is the parent, and the other firm is referred to as its subsidiary.
It is the standard practice for the accounts of a subsidiary company to be merged with its parent’s financial statements. However, the financial records of a firm in which a non-controlling interest is held, will not be merged with those of the investor.
Remember that a person who holds a non-controlling interest may also be able to exercise a certain degree of influence on the company in which it owns a stake. For example, holding 15% of the share capital of a firm may give the investor the right to a seat on the board of directors. This could provide some measure of control over the operations of the company.
Example of non-controlling interest
Household Products Inc., a manufacturer of consumer goods, acquires an 80% stake in Shopper’s Paradise, a retailer that sells these goods through its 300 stores spread across 20 states.
As Household Products holds over 50% of the shares of Shopper’s Paradise, the financial statements of the latter are merged with those of its parent company. Household Products records the 20% of Shopper’s Paradise’ shares that it does not own as non-controlling interest on its balance sheet. The net income of the subsidiary company is divided between its parent and non-controlling shareholders in the ratio of 80:20.
A non-controlling interest does not give an investor the right to exercise direct control of a company’s affairs. However, if the holding is large enough, it may entitle the investor to a seat on the board of directors.