What is minority interest? In what ways is it like debt and in what ways is it like equity?
Minority interest, also known as minority shareholders' interest or non-controlling interest, refers to the equity ownership in a company held by individuals or entities other than the controlling shareholders.
To understand how minority interest is like debt and equity, let's break it down:
Similarities to debt:
1. Fixed claim: Both debt and minority interest represent a fixed claim on the company's assets and earnings. Creditors have a legal right to repayment of their loans, while minority shareholders have a claim on a portion of the company's profits and assets.
2. Limited control: Like debt, minority interest holders typically have limited control over the company's operations and decision-making. They have a voice but may not have enough voting power to influence significant strategic decisions.
3. Priority in case of liquidation: In the event of a company's liquidation, both debt holders and minority interest shareholders have a priority claim on the remaining assets after the payment of other liabilities.
Differences from debt:
1. Ownership: Minority interest represents an ownership stake in the company, while debt represents a contractual obligation to repay borrowed funds. As minority shareholders, individuals or entities have a residual claim on the company's earnings and growth potential, unlike creditors who are entitled to fixed interest payments.
2. Risk and reward: Debt holders receive fixed interest payments, regardless of the company's performance or profitability. Conversely, minority shareholders share in the company's risks and rewards and benefit from any increase in the company's value.
3. Participation in decision-making: While minority shareholders often have limited control compared to majority shareholders, they usually have some voting rights and the ability to influence certain decisions. Debt holders, on the other hand, generally do not have voting rights or a say in company decisions.
In summary, minority interest shares similarities with debt in terms of a fixed claim and limited control. However, it resembles equity more closely, as it represents ownership in the company and shares in the company's risks and rewards.