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What is Non-Controlling Interest?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 December 2016
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Non-controlling interest is a percentage of ownership or interest in a company that is less than enough to influence the overall operation and decision making processes associated with the business. With smaller companies, any degree of ownership that is less than fifty percent may be considered non-controlling interest. In larger corporations, individual stockholders often own less than ten percent of the outstanding shares, and are generally considered to have non-controlling interest, since the corporation is likely to retain as much as fifty-one percent of the issued stock as a means of keeping control of the company operation.

While a non-controlling interest does not allow the investor or owner to actually determine the future course of the company, this type of investment does offer several benefits. For example, holding this type of interest does result in receiving dividends or other compensation when the business is operating at a profit. Depending on the structure of the company and the laws that apply to the issuing of stock in the jurisdiction where the business is headquartered, holding a non-controlling interest may preclude the necessity of holding voting shares at all. When this is the case, there is not even the need to cast a ballot for elections to a board of directors.

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One of the benefits of having investors that hold non-controlling interest is that a company can generally make decisions with relatively little need to discuss options with someone who is not intimately involved with the day to day operation of the company. The assumption is that the directors and officers of the business have the degree of experience and background to make decisions that are ultimately in the best interests of the continuation of the company, and thus present the best model for making sure that investors continue to generate returns on their investment.

At the same time, the potential for investors with non-controlling interest to band together and vote as a bloc also provides something of a check and balance system, especially when the bylaws allow these investors to vote on elections to the board and other specific issues. In this scenario, the holder of the controlling interest may find it wise to consider the opinions and concerns of the minority investors before making a final decision. Failure to do so can lead to situations where shareholders with a minority interest are open to the advances of a corporate raider, who can secure a considerable amount of shares and possibly force the majority shareholder to sell out, leaving the company open to possible reorganization or even deconstruction by the raider.

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