The consolidated financial statements for the results of operations and financial position of a group of companies are required to be presented as if all of the companies were a single company in accordance with FASB’s Accounting Standards Codification (ASC) 810-10-10-1. There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities. In general, a parent company is required to consolidate the financial information of another company if it has a “controlling financial interest” in the other company.
When a company acquires at least 50 percent but less than 100 percent of the equity interests of a private target company (a Minority Interest Acquisition), it can be difficult to ascertain whether the acquirer has obtained a controlling financial interest for purposes of the financial accounting rules. Minority equityholders will typically retain very limited control over the target company in a Minority Interest Acquisition and often negotiate certain rights over significant actions of the company to protect their interests. Such rights and protections may include the right to receive certain information about the target company or review books and records of the target company, preemptive rights, the ability to require the target company or the other equityholders to purchase their equity at a certain time or under certain circumstances (i.e., a “put right”) or “tag along” rights, or the right to designate a member of the target company’s board of directors (or managers) or have board observer rights. Minority equityholders often insist on having certain consent rights or require unanimous board approval (if minority equityholders have a board seat) before the target’s management (which is typically controlled by the acquirer) can make certain decisions or take certain actions that could have an adverse impact on the minority equityholders. These rights include the company’s ability to (1) change the target’s business or enter into a new line of business; (2) dissolve or liquidate the target; (3) amend or terminate any organizational or governing document; (4) sell the target or issue any equity interests of the target; (5) acquire or dispose of assets or equity interests outside the ordinary course of business; (6) incur certain indebtedness or encumber assets; (7) make certain distributions or redemptions; (8) enter into, terminate or amend material contracts; (9) approve or materially change the budget; (10) enter into any affiliate transaction; or (11) hire or fire certain employees or substantially change their compensation.
