# Non-Controlling Interest Explained: Definition, Operation, and Examples

![Non-Controlling Interest](https://www.investopedia.com/thmb/RLpRRh2jfEO1OIKbW3kI1TrfTlw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Noncontrolling_interest_final-c38c56b5a1944e9cb2f7b0ccef0fa2c8.png)

*— Michela Buttignol / Investopedia*

> **Definition**
>
> A non-controlling interest is an ownership stake in a company where the shareholder owns less than 50% of the outstanding shares and lacks control over corporate decisions.

## What Is Non-Controlling Interest?

A non-controlling interest is an ownership position in which a shareholder owns less than 50% of outstanding shares and has no control over decisions. It is also called a minority interest.  

Non-controlling interests are measured at the [net asset value](https://www.investopedia.com/terms/n/nav.asp) of entities. They do not account for potential [voting rights](https://www.investopedia.com/terms/v/votingright.asp). There are two different types of non-controlling interest: direct and indirect.

Most public company [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) are considered non-controlling, even with a 5% to 10% equity stake, which is large in a single company. In contrast, a controlling or majority interest gives the shareholder voting rights and often influences the company's direction.

Consolidated financials typically include the parent company as the majority owner, a subsidiary, and a non-controlling-interest company. These financial statements show the three separate entities as if they were one company.

### Key Takeaways

*   Non-controlling interest, also known as minority interest, refers to a shareholder owning less than 50% of a company's outstanding shares, which results in no control over corporate decisions or votes.
*   There are direct and indirect non-controlling interests, with the former receiving a proportionate allocation of both pre- and post-acquisition amounts.
*   In the consolidation of financial statements, transactions between the parent and subsidiary or non-controlling interest firm are eliminated to present financials as a single entity.
*   Activist investors generally acquire an average of 6% of outstanding shares to influence changes, though even a minority position might be significant in smaller companies.  
      
      
    

## Deep Dive into Non-Controlling Interest

Most shareholders are granted a set of rights when they purchase common stock, including the right to a cash [dividend](https://www.investopedia.com/terms/d/dividend.asp) if the company has sufficient [earnings](https://www.investopedia.com/terms/e/earnings.asp) and declares a dividend. Shareholders may also have the right to vote on major corporate decisions, such as a [merger](https://www.investopedia.com/terms/m/merger.asp) or company sale. A corporation can issue different classes of stock, each with different shareholder rights.

Generally, there are two types of non-controlling interests: direct and indirect. A direct non-controlling interest receives a proportionate allocation of all pre- and post-acquisition amounts of recorded equity of a subsidiary. An indirect non-controlling interest receives a proportionate allocation of a subsidiary’s post-acquisition amounts only.

An investor usually cannot communicate specific proposals to the board and management unless they control 5% to 10% of the shares. They can’t propose changes to the board of directors, propose changes at shareholder meetings, or team with other investors to make their actions more likely to succeed until they control this number of shares. Such investors are termed [activist investors](https://www.investopedia.com/terms/a/activist-investor.asp).

> **Important**
>
> Activist investors range widely in style of action and objectives that can range from seeking operational improvements to restructuring to natural environment and social policy.

## Financial Statements and Non-Controlling Interest

Consolidation is a set of financial statements that combines the accounting records of several entities into one set of financial. These typically include a parent company as the majority owner, a subsidiary or a purchased firm, and a non-controlling-interest company. The consolidated financials allow investors, creditors, and company managers to view the three separate entities as if all three firms are one company.

Consolidation assumes that a parent and a non-controlling interest company jointly purchase a subsidiary's equity. Any transactions between the parent and the subsidiary company or between the parent and the non-controlling-interest firm are eliminated before the [consolidated financial statements](https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp) are created.

## Real-World Example of Non-Controlling Interest

Assume that a parent company buys 80% of XYZ firm and that a non-controlling-interest company buys the remaining 20% of this subsidiary. The subsidiary’s assets and liabilities on the balance sheet are adjusted to [fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp), and those values are used on the consolidated financial statements. The excess is posted to a [goodwill](https://www.investopedia.com/terms/g/goodwill.asp) account in the consolidated financial statements if the parent and a non-controlling interest pay more than the fair value of the net assets.

Goodwill is an extra expense when purchasing a company for more than its fair market value. Goodwill is amortized into an expense account over time after an impairment test. This follows the [purchase-acquisition accounting](https://www.investopedia.com/terms/p/purchaseacquisition.asp) method approved by the Financial Accounting Standards Board (FASB).

According to the FASB, non-controlling interest can also refer to the percentage of the company not owned when more than 50% is owned.

## What Is Net Asset Value?

Net asset value (NAV) is the value that remains after all liabilities have been expensed. It’s typically just one factor considered in the performance of an asset.

## How Many Shares Are Necessary to Become an Activist Investor?

An activist investor acquires an average of 6% of a company’s outstanding shares, according to the Harvard Law School Forum on Corporate Governance. Less than 5% of outstanding shares awards a minor ownership position, but even 5% might be a large holding in a small, single company.

## What Is Goodwill in Accounting?

Goodwill is considered to be an intangible asset. The term is commonly used to describe a situation in which Company A is willing to pay more than the fair market value of Company B’s net assets in a bid to acquire Company B.

## The Bottom Line

Non-controlling interest, also known as a minority interest, involves owning less than 50% of a company's shares and having no control over corporate decisions. In contrast, controlling interests give shareholders voting rights and influence over company strategy.

The potential financial implications for non-controlling interest holders include receiving proportionate allocations of a subsidiary's equity or profit. Non-controlling interests are represented in consolidated financial statements, along with the parent company as the majority owner and a subsidiary or a purchased firm. The consolidated financials show the three separate entities as if they were all one company. For example, if there is an excess in goodwill posted, then it might mean the parent company and non-controlling interest paid more than the fair value of the net assets.

Investors should consult with financial professionals for personalized advice on investment decisions and understanding non-controlling interest implications.

> **Article Sources**
>
> 1.  CFI Education. “[Goodwill](https://corporatefinanceinstitute.com/resources/accounting/goodwill/).”
>     
> 2.  Financial Accounting Standards Board. “[Summary of Statement No. 160](https://www.fasb.org/page/PageContent?pageId=/reference-library/superseded-standards/summary-of-statement-no-160.html&bcpath=tff).”
>     
> 3.  Morningstar. “[Net Asset Value](https://www.morningstar.com/investing-definitions/net-asset-value).”
>     
> 4.  Harvard Law School Forum on Corporate Governance. “[Activist Investors and Target Identification](https://corpgov.law.harvard.edu/2016/06/23/activist-investors-and-target-identification/).”