From: Sue Smith, CPA
Subject: Minority Shareholder Rights
Joe Brock is a minority interest shareholder in Big Corporation. Leslie Ross is a shareholder that owns less than 50% of the voting shares, but has the majority of the voting shares and thus has taken control of the corporation. According to SFAS 94, due to this control, Leslie Ross must consolidate his interest with Big Corporation. Mark Jones, a minority shareholder, is in a position of management for the company. Joe Brock is unhappy with Mr. Jones’ decisions and would like to challenge his authority.
Determine what factors arise in considering if a minority investor can make maintain such control or what can be done to prevent others from exercising control of the corporation.
Though Leslie Ross holds a majority of the voting interest, ASC 810-10-15-10 states that if the minority investors hold substantive participating rights, the majority investor is limited and therefore is not in “control” of the corporation and the majority owned subsidiary may not be consolidated. If the minority investors hold only protective rights, Leslie Ross is considered in control of the corporation and the majority owned subsidiary should be consolidated.
If the minority investors hold participating rights, Leslie Ross is in control and has the authority to appoint directors. The Board of Directors can choose to give a minority investor, in this case Mark Jones, the power to make management decisions for the company.
ASC 810-10-25-10 through 11 states that minority shareholders that hold substantive participating rights may have certain approval or veto rights, and can be involved in selecting and terminating the management of a company. If Joe Brock and other minority shareholders hold these substantive participating rights, they can vote to remove Mark from his management position.
To determine whether or not minority investors hold substantive...