Non-controlling interest, also known as minority interest, refers to a shareholder’s ownership stake in a corporation where the stake is less than 50% of the existing shares, and thus, the shareholder does not have a controlling influence on the company. This can apply to a stake held by an individual investor or another company.
In cases where a company owns a majority stake (over 50%) in another company, that majority-owning company has control over the other. However, the remaining ownership (less than 50%) is considered the non-controlling or minority interest. Despite this lack of control, minority shareholders still have the right to vote on corporate matters, although their votes won’t have the power to sway the decision if the majority shareholder votes the opposite way.
For example, suppose Company A purchases 70% of Company B. In this case, Company A has a controlling interest in Company B and can make decisions regarding Company B’s operations. The remaining 30% of Company B is owned by other shareholders and is considered the non-controlling interest. These shareholders have a stake in the company, but do not have a controlling influence over Company B’s operations.
Example of Non-Controlling Interest
Suppose BigTech Corp. purchases 80% of the shares in SmallSoft Inc., a smaller technology company. This makes BigTech Corp. the majority shareholder, giving it control over SmallSoft Inc., including decisions on its operations, management, and strategic direction.
However, the remaining 20% of shares in SmallSoft Inc. are owned by various other shareholders, including both individual investors and institutional shareholders like pension funds or mutual funds. This 20% stake is referred to as the non-controlling interest, because these shareholders collectively don’t have enough voting power to override decisions made by BigTech Corp.
Even though they don’t control SmallSoft Inc., these non-controlling shareholders still have the right to vote on certain corporate matters and receive their proportionate share of the company’s profits as dividends. If SmallSoft Inc. is sold, they’ll also receive their proportionate share of the proceeds.
Non-controlling interest is an important concept in corporate finance, as it helps define who has control over a corporation and how its profits are distributed. It’s also a significant consideration in mergers and acquisitions, as well as in the preparation of consolidated financial statements.