2.4 Kick-Out Rights
ASC 810-10 — Glossary
Kick-Out Rights (VIE Definition)
The ability to remove the entity with the power to direct the activities of a VIE that most significantly impact the
VIE’s economic performance or to dissolve (liquidate) the VIE without cause.
Kick-Out Rights (Voting Interest Entity Definition)
The rights underlying the limited partner’s or partners’ ability to dissolve (liquidate) the limited partnership or
otherwise remove the general partners without cause.
In the determination of whether a legal entity is a VIE, two different definitions of kick-out rights apply depending on whether the legal entity is (1) a limited partnership (or similar entity) that uses the voting interest entity definition or (2) other than a limited partnership (or similar entity) that uses the VIE definition. Both definitions have a similar theme (i.e., whether the party that is making decisions about a legal entity can be removed without cause). In the evaluation of whether a legal entity is a VIE, a decision maker does not have control over a legal entity if another party or parties have the substantive right to remove the decision maker without cause.
In the analysis of a legal entity other than a limited partnership, the VIE definition should be applied. For these types of legal entities, a kick-out right is substantive if a single equity holder at risk (including its related parties and de facto agents) is able to exercise the kick-out right (see Section 5.3.1.1.3.4). If the single equity holder has a substantive kick-out right, the equity investors at risk, as a group, would possess the power to direct the most significant activities of the legal entity.
The definition of kick-out rights in the evaluation of whether a limited partnership (or similar entity) is a VIE is the same as the definition that applies under the voting interest entity model. For a kick-out right to be substantive for a limited partnership (or similar entity), a simple majority (or lower threshold) of the limited partner interests (excluding those held by the general partner, entities under common control with the general partner, and entities acting on behalf of the general partner) must be able to remove the general partner without cause (see Section 5.3.1.2.2).
For kick-out rights to affect the consolidation analysis under either definition, the rights must be substantive (i.e., there can be no significant barriers to exercising those rights). See Section 5.3.1.2.4 for guidance on determining whether kick-out rights are substantive.