The Treatment of Minority Shareholders

The treatment of minority shareholders

The above examples have assumed that the parent company is able to persuade all the shareholders of the proposed subsidiary to transfer their shares to it, and that the subsidiary becomes a wholly owned subsidiary. It is not always the case that all the shareholders accept the offer, and a substantial minority may turn down the offer and remain as shareholders in S Ltd. The City Code on Takeovers and Mergers does not allow bids for only part of the share capital of a company, and a takeover bid has to be made for 100 per cent of the shares not already held by the parent. The bidding company in offering to buy 100 per cent of the capital of the proposed subsidiary commonly makes its offer conditional on acceptance by 90 per cent of the outside shareholders, so that it can take advantage of S 209 and compulsorily purchase a small minority of shareholders up to 10 per cent of the outstanding capital. If the bidding company obtains control of more than 50 per cent of the voting share capital, but clearly has no chance of obtaining a 90 per cent acceptance level, because a sizeable minority of shareholders are opposed to the bid, it still may decide to go ahead with the bid and allow a minority of shareholders to retain their shares in what will become a subsidiary company. Most subsidiaries are 100 per cent owned, often having been set up by the parent company itself, but it is not uncommon to find a subsidiary in which a minority of shareholders hold up to 25 per cent of the voting capital. There may well be good reasons for this. Most takeovers are amicably agreed between the parties and are small in size and are often for private companies in family businesses and the former shareholders may wish to retain some small interest in what was their own company, and the parent may be willing to keep the family connection with a view to retaining the goodwill of customers and the management expertise of the former owners.

Such minority shareholders still retain an interest in their original company and are not members of the group. Their interest, called a minority interest, may theoretically extend up to 50 per cent of the net assets but is commonly less than 25 per cent. A minority interest clearly needs to be excluded from the capital and reserves of the group, because the minority has no claim on the group. It would be possible to consolidate just (say) the three-quarters of the net assets of the subsidiary company which have been acquired by the group, but this approach is not adopted. All the assets and liabilities of the subsidiary are included in the group accounts and the minority interest is shown as a deduction proportional to the interest of the minority shareholders. This is quite proper because although the group does not own all the net assets of the subsidiary it does have effective control of all of them, including those in which the minority have an interest. A parent company only needs bare voting control which is just a little more than 50 per cent to be in a position to control 100 per cent of the assets.

Thus the minority are entitled to their share of the share capital and reserves at the date that the parent company acquires its controlling interest and their share of income made after acquisition. If a subsidiary company which has a minority passes outside the group, and reduces the total interest of the minority the proportion paid to the minority passes outside the group, and reduces the total interest of the minority by the amount of the dividend as shown in the group balance sheet. SSAP 14 provides that minority interests in the share capital and reserves of a group should be disclosed separately in the consolidated balance sheet. Similarly, the profits and losses attributable to minority interests should be shown separately in the consolidated income statement.


Interested in Current Cost Accounting in 2018

Read on: Consolidating Group Income

Consolidating group income

At the end of the year the income of both companies results in a corresponding increase in their net assets. The income of a subsidiary made after acquisition is regarded as distributable from the group point of view and is combined with the income of the parent to show the group income on the consolidated balance sheet.

The income of the subsidiary in future years will also be added along with the income of the parent company and the balance brought forward on the income statement, so that a total figure for group income is carded forward at the... see: Consolidating Group Income