Question

In this discussion topic, explain why a corporation would choose one type of interest over the other when purchasing a stake in another corporation. Include in your discussion the advantages and disadvantages of each interest type for the acquiring and subsidiary corporation.

Answer 1

While a corporation makes investment in another corporation the investment generally results in one or the other type of interests in the corporation in which the investment is made, these are controlling and non-controlling interests. Controlling interests is when the investing corporation acquires major portion of shares of another corporation. Non-controlling interests if when the quantum of investment is relatively less, i.e. lower than 50% of interests are acquired by the investing corporation.

Advantages of controlling interests are as following:

1. The investing company will be able to exercise significant amount of control in operating and decision making process of the subsidiary corporation.
2. The management of the investing company will be able to take decisions on operations and management of the subsidiary corporation.
3. Expansion of scale of operations subsequent to the acquisition.

There is no disadvantage of controlling interests in the subsidiary company.

However, there are number of disadvantages for acquiring non-controlling interests and these are as following:

1. Inability to exercise control in the operations of the company in which investment has been made.

In case of adverse financial position of the company, i.e. the company in which investment has been made the value of investment will be reduced.