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11.3 Controlling and Noncontrolling Interests
One consideration in determining the value of a business ownership interest is the extent to which that interest can exercise control over business activity. ControlThe power to direct the policies and management of the business. refers to the power to direct the policies and management of the business. Control is most commonly measured by voting power—holding more than 50% of the voting equity of the company. In some cases, when there is no majority stockholder, other circumstances can lead to one owner having effective control.
When there is a controlling interest, other ownership interests are said to be minorityInterests that represent less than 50 percent of the voting power in the company. or noncontrolling interestsInterests that represent less than 50 percent of the voting power in the company.. Such interests represent 50% of the voting power in the company. A voting interest of exactly 50% is neither a controlling nor a minority interest. While a 50% interest cannot cause things to happen, it can prevent things from happening. Having two 50% owners is often considered an inefficient business structure, as a stalemate occurs if the two owners do not agree. However, that structure—shared control—appears in many joint ventures.
A controlling interest is generally considered to be worth more, on a per-share basis, than a noncontrolling interest. Among the powers of a controlling interest are the abilities to:Pratt (2001).
- establish the nature and policies of the business;
- select officers, employees, and directors, and set their compensation and benefits;
- enter into contracts with suppliers, customers, and others;
- determine the existence and amount of dividends;
- decide on acquisition and disposition of assets;
- determine the financing and capital structure of the company.
A controlling owner has different options for disposing of the investment (exit) or converting it to cash (liquidity) than does a noncontrolling owner. The controlling owner’s exit or liquidity options include selling the controlling interest, taking the company public, or deciding to liquidate the business. The noncontrolling owner’s exit or liquidity options include selling to the controlling owner or selling to another noncontrolling owner. When a buyer does not exist, the noncontrolling owner effectively has no exit option. Continuing to hold the investment is a liquidity option to the extent that the business pays dividends.