Introduction
In share-for-share exchanges, some shareholders may choose not to participate. As a result, they remain owners of the original subsidiary rather than becoming part of the post-acquisition parent entity. These shareholders are classified as non-controlling interest (NCI) shareholders in the consolidated financial statements.
For example, let’s say in a group of 200 shareholders, 150 agree to a share exchange, but 50 (25%) do not. The impacts are illustrated below.
Illustration of the Impact on Consideration Exchanged
The non-participation of some shareholders affects the calculation of the consideration exchanged as follows:
| All shareholders | 150 shareholders (50 shareholders abstanining from the transaction) | |
| Public Company number of shares issued | 300 | 300 |
| Private Company number of shares issued | 200 | 200 |
| Private Company shares relevant to transaction | 200 | 150 |
| Share for share exchange (3:1) | 3 | 3 |
| Shares issued to the Private Company | 600 | 450 |
| Total number of share in the Combined Company | 900 | 750 |
| Post-acquisition ownership by the Private Company’s shareholders | 67% | 60% |
| Number of shares as-if accquired in an ordinary manner (Public Company’s shares less non-participating Private Company’s shareholders) | 300 | 250 |
| Shares given to other shareholders (300 x post-acquisition ownership) | 100 | 100 |
| Private Company’s Price per share, $ | 6 | 6 |
| Deemed consideration, $ | 600 | 600 |
The decrease in post-acquisition ownership (60%) increases the consideration exchanged. However, this is balanced by a reduced number of shares (250) compared to participation of all shareholders, which has an offsetting impact. Thus, the total consideration exchanged remains unchanged.
Illustration of the impact on equity section
NCI is valued based on the net assets at their carrying amounts in the acquirer’s books before acquisition. The NCI is treated under the proportional method, and impairments of goodwill are not allocated to it. The necessary adjusting entry is:
| Debit | Credit | |
| Retained earnings (25% x 2,200) | 550 | |
| Share capital (25% x 200) | 50 | |
| Non-controlling interest (balancing figure) | 600 |
The resulting adjusted financial statement will show a decrease in Share capital by 50 due to the non-participation of shareholders holding 50 ordinary shares, and a reallocation of retained earnings to them.
| Private company standalone financials | Public company standalone financials | Transaction adjustments | Consolidated | |
| Current assets | 400 | 400 | 800 | |
| Non-current assets | 3,700 | 1,900 | 300 | 5,900 |
| Goodwill | 100 | 100 | ||
| Total assets | 4,100 | 2,300 | 6,800 | |
| Current liabilities | 800 | 400 | 1,200 | |
| Non-current liabilities | 900 | 1,100 | 2,000 | |
| Total liabilities | 1,700 | 1,500 | 3,200 | |
| Retained earnings | 2,200 | 500 | -550 | 1,650 |
| Other equity | 1,200 | 1,200 | ||
| Share capital (300) | 300 | |||
| Share capital (200) | 200 | -50 | 150 | |
| Non-controlling interest | 600 | 600 | ||
| Total equity | 2,400 | 800 | 3,600 | |
| Total liabilities and equity | 4,100 | 2,300 | 6,800 |
Conclusion
This guide demonstrates how to account for non-controlling interest in reverse acquisition transactions.